Attached files
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EX-10.6 - WEIKANG BIO-TECHNOLOGY GROUP CO., INC. | v175643_ex10-6.htm |
EX-10.7 - WEIKANG BIO-TECHNOLOGY GROUP CO., INC. | v175643_ex10-7.htm |
EX-10.8 - WEIKANG BIO-TECHNOLOGY GROUP CO., INC. | v175643_ex10-8.htm |
EX-21.1 - WEIKANG BIO-TECHNOLOGY GROUP CO., INC. | v175643_ex21-1.htm |
EX-23.1 - WEIKANG BIO-TECHNOLOGY GROUP CO., INC. | v175643_ex23-1.htm |
EX-10.5 - WEIKANG BIO-TECHNOLOGY GROUP CO., INC. | v175643_ex10-5.htm |
As filed
with the Securities and Exchange Commission on March 25, 2010
Registration
No. 333-
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
WEIKANG
BIO-TECHNOLOGY GROUP COMPANY, INC.
(Exact
name of registrant as specified in its charter)
Nevada
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2833
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26-2816569
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||||
(State
or other jurisdiction of
incorporation
or organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer
Identification
Number)
|
No.
365 Chengde Street, Daowai District, Harbin
Heilongjiang
Province, The People’s Republic of China 150020
+ (86)
0451-88355530
(Address,
including zip code, and telephone number,
including
area code, of registrant’s principal executive offices)
Yin
Wang
No.
365 Chengde Street, Daowai District, Harbin
Heilongjiang
Province, The People’s Republic of China 150020
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies
to:
Adam M.
Guttmann, Esq.
Crone Law
Group
101
Montgomery Street, Suite 1950
San
Francisco, California 94104
(415)
955-8900
(415)
955-8910 (fax)
Approximate
date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration
statement.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the
following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definition of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer
|
o
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Accelerated
filer box.
|
o
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||
Non-accelerated
filer
|
o
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Smaller
reporting company
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x
|
(Do not
check if a smaller reporting company)
CALCULATION
OF REGISTRATION FEE
Proposed
|
Proposed
|
|||||||||||||||
Maximum
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maximum
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Amount
of
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||||||||||||||
Title
of each class of securities to be
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Amount
to be
|
offering price
|
aggregate
|
registration
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||||||||||||
registered
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registered
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per
unit (1)
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offering
price
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fee
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||||||||||||
Common
Stock, 0.0001 par value issuable upon exercise of Class A
Warrants
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312,500 | $ | 2.90 | $ | 906,250 | $ | ||||||||||
Common
Stock, 0.0001 par value issuable upon exercise of Class B
Warrants
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312,500 | 2.90 | 906,250 | |||||||||||||
Common
Stock, 0.0001 par value
|
1,470,588 | 2.90 | 4,264,705 | |||||||||||||
Total
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2,095,588 | $ | 6,077,205 | $ | 434 | (2) |
(1)
|
Estimated
solely for purposes of calculating the registration fee in accordance with
Rule 457(c) under the Securities Act of
1933.
|
(2)
|
The
filing fee has been paid with this
filing.
|
The
registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE SELLING
STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT IS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND BECOMES EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE SALE IS NOT
PERMITTED.
SUBJECT
TO COMPLETION, DATED ___, 2010
PROSPECTUS
WEIKANG
BIO-TECHNOLOGY GROUP COMPANY, INC.
2,095,588
SHARES OF COMMON STOCK
This
prospectus relates to the resale by the selling stockholders identified in this
prospectus of up to 2,095,588 shares of common stock, including shares of common
stock issuable upon the exercise of warrants. All of the shares, when sold, will
be sold by these selling stockholders. The selling stockholders may sell these
shares from time to time in the open market at prevailing prices or in
individually negotiated transactions, through agents designated from time to
time or through underwriters or dealers. We will not control or determine the
price at which the selling stockholders decide to sell their shares. The selling
stockholders may be deemed underwriters of the shares of common stock, which
they are offering. We will pay the expenses of registering these
shares.
We are
not selling any shares of common stock in this offering and therefore will not
receive any proceeds from the sale of common stock hereunder. We may receive
proceeds from any exercise of outstanding warrants.
Our
common stock is listed on the Over-The-Counter Bulletin Board under the symbol
“WKBT.” The last reported sales price per share of our common stock as reported
by the Over-The-Counter Bulletin Board on March 22, 2010, was
$2.90.
Investing
in these securities involves significant risks. See “Risk Factors” beginning on
page 2 .
No
underwriter or person has been engaged to facilitate the sale of shares of
common stock in this offering. None of the proceeds from the sale of stock by
the selling stockholders will be placed in escrow, trust or any similar
account.
We may
amend or supplement this prospectus from time to time by filing amendments or
supplements as required. You should read the entire prospectus and any
amendments or supplements carefully before you make your investment
decision.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date
of this prospectus is ___________, 2010.
TABLE OF
CONTENTS
PAGE
NO.
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SUMMARY
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1
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ABOUT
THIS OFFERING
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1
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RISK
FACTORS
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2
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SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS
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10
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USE
OF PROCEEDS
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10
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MARKET
FOR COMMON EQUITY AND RELATED STOCHOLDER MATTERS
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10
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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11
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DESCRIPTION
OF BUSINESS
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18
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DIRECTORS
AND EXECUTIVE OFFICERS
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24
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EXECUTIVE
COMPENSATION
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27
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CERTAIN
RELATIONSIHIPS AND RELATED TRANSACTIONS
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28
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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30
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DESCRIPTION
OF SECURITIES
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30
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SELLING
STOCKHOLDERS
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34
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PLAN
OF DISTRIBUTION
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34
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DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
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36
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LEGAL
MATTERS
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37
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EXPERTS
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37
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WHERE
YOU CAN FIND MORE INFORMATION
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37
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FINANCIAL
STATEMENTS
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F-1
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PROSPECTUS
SUMMARY
The
following summary highlights selected information contained in this prospectus.
This summary does not contain all the information you should consider before
investing in the securities. Before making an investment decision, you should
read the entire prospectus carefully, including the "risk factors" section, the
financial statements and the notes to the financial statements. As used
throughout this prospectus, the terms “Weikang,” “WKBT,” the “Company,” “we,”
“us,” and “our” refer to Weikang Bio-Technology Group Company, Inc., and its
subsidiaries and predecessors, unless indicated otherwise.
OUR
COMPANY
Overview
We are principally engaged in
developing, manufacturing and distributing health and nutritional supplements in
China. The Company
has also expanded its business scope to
develop, manufacture and distribute Chinese herbal extract products and
GMP certified western prescriptive medicine.
The
Company was originally incorporated on May 12, 2004 in the State of Florida as
Expedition Leasing, Inc. On July 12, 2008, the Company redomiciled from the
State of Florida to the State of Nevada and changed to its name to Weikang
Bio-Technology Group Co., Inc. pursuant to an acquisition of
Sinary Bio-Technology Holdings Group, Inc. (or Sinary), a Nevada
corporation and, Sinary’s wholly owned subsidiary, Heilongjiang Weikang
Biotechnology Group Co., Ltd. (or Heilongjiang Weikang), a limited liability
company organized and existing under the laws of the People’s Republic of China
(or PRC). Upon completion of the transaction on December 7, 2007, Sinary and
Heilongjiang Weikang became our wholly-owned subsidiaries. The transaction was
treated for accounting purposes as a capital transaction and recapitalization by
the accounting acquirer and as a re-organization by the accounting
acquiree.
ABOUT
THIS OFFERING
This
prospectus relates to the resale by the selling stockholders identified in this
prospectus of up to 2,095,588 shares of common stock, including shares of common
stock issuable upon the exercise of warrants. All of the shares, when sold, will
be sold by these selling stockholders. The selling stockholders may sell their
shares of common stock from time to time at prevailing market prices. We will
not receive any proceeds from the sale of the shares of common stock by the
selling stockholders.
Common
Stock Offered:
|
Up
to 2,095,588 shares of common stock, including shares of common stock
issuable upon the exercise of common stock purchase warrants, of which (i)
the Class A warrants are exercisable for an aggregate of 312,500 shares
have an initial exercise price equal to $3.00 per share, and (ii) the
Class B warrants are exercisable for an aggregate of 312,500 shares have
an initial exercise price equal to $5.00 per share, all warrant exercise
prices are subject to certain adjustments.
|
Common
Stock Outstanding at January 31, 2010:
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27,784,388
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Use
of Proceeds:
|
We
will not receive any proceeds from the sale of the 2,095,588 shares of
common stock subject to sale by the selling stockholders under this
prospectus. However, we may receive the sale price of any common stock we
sell to the selling stockholders upon exercise of the outstanding
warrants. Any net proceeds we receive from the Selling Stockholders
through the exercise of warrants will be used for general corporate
purposes.
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OTC
Bulletin Board Symbol:
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WKBT
|
1
RISK
FACTORS
An
investment in our common stock is speculative and involves a high degree of risk
and uncertainty. You should carefully consider the risks described below,
together with the other information contained in this prospectus, including the
consolidated financial statements and notes thereto of our Company, before
deciding to invest in our common stock. The risks described below are not the
only ones facing our Company. Additional risks not presently known to us or that
we presently consider immaterial may also adversely affect our Company. If any
of the following risks occur, our business, financial condition and results of
operations and the value of our common stock could be materially and adversely
affected.
Risks
Relating to Our Business
Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
We have a
limited operating history. Although Weikang commenced operations in 2005, the
company was a developmental stage company until May 2006 when it began selling
its products. Accordingly, you should consider our future prospects in light of
the risks and uncertainties experienced by early stage companies such as our
company in China. Some of these risks and uncertainties relate to our ability
to:
·
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maintain our market
position in the health supplements business in
China;
|
·
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offer new and innovative products
to attract and retain a larger customer
base;
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·
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attract additional customers and
increase spending per
customer;
|
·
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increase awareness of our brand
and continue to develop user and customer
loyalty;
|
·
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respond to competitive market
conditions;
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·
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respond to changes in our
regulatory environment;
|
·
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manage risks associated with
intellectual property
rights;
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·
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maintain effective control of our
costs and expenses;
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·
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raise sufficient capital to
sustain and expand our
business;
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·
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attract, retain and motivate
qualified personnel; and
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·
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upgrade our technology to support
additional research and development of new
products.
|
If we are
unsuccessful in addressing any of these risks and uncertainties, our business
may be materially and adversely affected.
We
may need additional financing to execute our business plan.
The
revenues from the production and sale of health supplements products and the
projected revenues from these products may not be adequate to support our
expansion and product development programs. We may need substantial additional
funds to build new production facilities, pursue further research and
development, obtain regulatory approvals, market our products, and file,
prosecute, defend and enforce our intellectual property rights. We may seek
additional funds through public or private equity or debt financing, strategic
transactions and/or from other sources. We could enter into collaborative
arrangements for the development of particular products that would lead to our
relinquishing some or all of our rights to the related technology or
products.
There are
no assurances that future funding will be available to us on favorable
terms or at all. If additional funding is not obtained, we will need to reduce,
defer or cancel development programs, planned initiatives or overhead
expenditures, to the extent necessary. The failure to fund our capital
requirements would have a material adverse effect on our business, financial
condition and results of operations.
2
Our
certificates, permits, and licenses are subject to governmental control and
renewal, and Weikang will not be able to operate if they are not
maintained.
Heilongjiang
Weikang has attained the certificates, permits, and licenses required for the
manufacturing, processing and distribution of health supplement products in the
PRC and Tianfang has attained the certificates, permits, and licenses required
for the manufacturing, processing and distribution of western medicine and
Chinese herbal extracts. In the event that we are not able to renew the
certificates, permits and licenses, all or part of our operations may be
terminated. Furthermore, if escalating compliance costs associated with
governmental standards and regulations restrict or prohibit any part of our
operations, it may adversely affect our operation and
profitability.
Our
profitability could be adversely affected from the loss of preferential tax
treatment.
Weikang
was exempt from income tax for a period of three years. The preferential tax
concession that was granted by the Shuangcheng Municipal Government expired in
2008, and has not been renewed. Weikang’s tax liabilities will increase as a
result and its profits will likely decline. The company is now
responsible for a 25% income tax.
We
cannot guarantee the protection of our intellectual property
rights.
To protect the reputation of
our products, we have applied for registration of our trademarks in the PRC
where our sole operating business is located.
Presently,
all of our products are sold under the brand name “Rongrun”. Since we
launched our products in May 2006, we are not aware of any infringement of such
trademark for sales of health supplement products. However, there is no
assurance that there will not be any infringement of our brand name or other
trademarks or counterfeiting of our products in the future. Should any such
infringement or counterfeiting occur, our reputation and business may be
adversely affected. We may also incur significant expenses and substantial
amount of time and effort to enforce our intellectual property rights in the
future. Such diversion of our resources may adversely affect our existing
business and future expansion plan.
We
rely on a few suppliers and any disruption with our suppliers could have an
adverse effect on our business.
We have
developed good working relationships with a limited number of suppliers for our
raw materials that are otherwise generally available. Although we believe that
alternative suppliers are available to supply materials, should any of these
suppliers terminate its business arrangements with us or increase the prices of
materials supplied by these suppliers, it could delay product shipments and
adversely affect our business operations and profitability.
We
are subject to the environmental protection laws of the PRC, which may result in
restrictions on our operations or liabilities for pollution.
Our
manufacturing process may produce by-products such as effluent, gases and noise,
which are harmful to the environment. We are subject to multiple laws governing
environmental protection, such as “The Law on Environmental Protection in the
PRC” and “The Law on Prevention of Effluent Pollution in the PRC”, as well as
standards set by the relevant governmental bodies determining the classification
of different wastes and proper disposal. China is experiencing substantial
problems with environmental pollution. Accordingly, it is likely that the
national, provincial and local governmental agencies will adopt stricter
pollution controls. There can be no assurance that future changes in
environmental laws and regulations will not impose costly compliance
requirements on us or otherwise subject us to future liabilities. Our business’s
profitability may be adversely affected if additional or modified environmental
control regulations are imposed upon us.
We
may suffer as a result of product liability or defective products.
We may
produce products which, despite proper testing, inadvertently have an adverse
pharmaceutical effect on the health of individuals. The existing PRC laws and
regulations do not require us to maintain third party liability insurance to
cover product liability claims. However, if a product liability claim is brought
against us, it may, regardless of merit or eventual outcome, result in damage to
our reputation, breach of contract with our customers, decreased demand for our
products, costly litigation, product recalls, loss of revenue, and the inability
to commercialize our some products. We currently are not aware of any existing
or anticipated product liability claims with respect to our
products.
3
There
are no conclusive studies regarding the medical benefits of nutritional
supplements.
We
currently manufacture, market and distribute seven products: (1) Rongrun Youth
Keeping Capsules; (2) Rongrun Energy Keeping Capsules; (3) Rongrun Vitamin Sugar
Capsules; (4) Rongrun Intestine Cleansing Capsules; (5) Rongrun Artery Cleansing
Capsules; (6) Rongrun Royal Jelly Extract; (7) Rongrun Kidney Boost Tonic; (8)
Ferrous Fumarate Granule; (9) Eucommia Ulmoides Oliy Granule; (10)Bushen
Qiangshen Table; and (11) Tinidazole Vaginal Effervescent Table. Some
of the ingredients in our current products (and we anticipate in our future
products) are vitamins, minerals, herbs and other substances for which there is
not a long history of human consumption. Although we believe all of our products
to be safe when taken as directed by us, there is little experience with human
consumption of certain of these product ingredients in concentrated form. In
addition, we are highly dependent upon consumers' perception of the safety and
quality of our products as well as similar products distributed by other
companies. We could be adversely affected in the event any of our products or
any similar products distributed by other companies should prove or be asserted
to be harmful to consumers. In addition, because of our dependence upon consumer
perceptions, adverse publicity associated with illness or other adverse effects
resulting from consumers' failure to consume our products as we suggest or other
misuse or abuse of our products or any similar products distributed by other
companies could have a material adverse effect on the results of our operations
and financial condition.
The
manufacture and distribution of nutritional supplements could result in product
liability claims.
We, like
any other retailer, distributor and manufacturer of products that are designed
to be ingested, face an inherent risk of exposure to product liability claims in
the event that the use of our products results in injury. Such claims may
include, among others, that our products contain contaminants or include
inadequate instructions as to use or inadequate warnings concerning side effects
and interactions with other substances. While we may obtain product liability
insurance in the future, we may not be able to obtain such insurance at a
reasonable cost, or, if available, cannot assure that it will be adequate
to cover liabilities. We do not anticipate obtaining contractual indemnification
from parties supplying raw materials or marketing our products. In any event,
any such indemnification if obtained will be limited by our terms and, as a
practical matter, to the creditworthiness of the indemnifying party. In the
event that we do not have adequate insurance or contractual indemnification,
product liabilities relating to defective products could have a material adverse
effect on our operations and financial conditions.
Adverse
publicity due to unfavorable research findings in connection with our products
could adversely affect our sales and financial condition.
We
believe the growth experienced by the nutritional supplement market is based in
part on national media attention regarding scientific research suggesting
potential health benefits from regular consumption of certain vitamins and other
nutritional products. Such research has been described in major medical
journals, magazines, newspapers and television programs. The scientific research
to date is preliminary.
In the
future, scientific research and/or publicity may not be favorable to the
nutritional supplement market or any particular product, or may be inconsistent
with earlier favorable research or publicity. Future reports of research that
are perceived as less favorable or that question earlier research could
have a material adverse effect on our operations and financial condition.
Because of our dependence upon consumer perceptions, adverse publicity
associated with illness or other adverse effects resulting from the consumption
of our products or any similar products distributed by other companies could
have a material adverse effect on our operations. Such adverse publicity could
arise even if the adverse effects associated with such products resulted from
consumers' failure to consume such products as directed. In addition, we may not
be able to counter the effects of negative publicity concerning the efficacy of
our products. Any such occurrence could have a negative effect on our
operations.
Risks
Related to Our Corporate Structure
If
we are unable to timely remit the purchase price for the acquisition of Weikang,
the approval and designation of Weikang as a foreign investment enterprise and
Sinary as the 100% owner of Weikang may be revoked, and the acquisition of
Weikang may be deemed void.
Pursuant
to the Transfer Agreement, Sinary agreed to acquire 100% of the equity interests
of Weikang from its owners for RMB 57 million. Under applicable PRC regulations,
the acquisition is deemed completed as of November 9, 2007, the date when the
Heilongjiang Office of the State Administration for Industry and Commerce issued
a FIE business license to Heilongjiang Weikang, and registered
Sinary as the 100% owner of Heilongjiang Weikang’s registered capital.
Pursuant to the terms of the equity interests transfer agreement and the
requirements of applicable PRC laws and regulations, Sinary had a grace period
to remit the acquisition price of 57 million RMB by August 6,
2009. In accordance with the terms of the Transfer Agreement,
Weikang has applied for and received PRC government approval for an extension on
the remittance date of the Acquisition Price. Sinary received PRC
government approval on August 7, 2009 for an extension of the remittance date
until June 30, 2010 and is seeking a further extenstion until January 20,
2012. In the event that we are unable to timely remit the Acquisition
Price, the Heilongjiang Provincial Government and Heilongjiang Office of the
State Administration for Industry and Commerce may revoke the approval and
license of Weikang as a foreign invested enterprise, and Sinary as the 100%
owner of Weikang, thereby unwinding the acquisition. In the event that the
acquisition is unwound, we will not be the owner of any equity interests in
Weikang, and as a result, Weikang will no longer be our operating business.
Should this occur, we may seek to acquire the equity interest of Weikang through
other means, although we cannot guarantee that we will do so, nor can we
guarantee that we will be successful if we do.
4
If
we are unable to timely remit the purchase price for the acquisition of
Tiangfang, the acquisition of Tianfang may be deemed void.
Pursuant
to the terms of our agreement Heilongjiang Weikang acquired 100% of the issued
and outstanding equity interest of Tianfang for the aggregate purchase price of
$15,000,000. The transaction was completed on July 22, 2008. Heilongjiang
Weikang has paid $11,192,970 of the $15,000,000 as of the end of 2008, and paid
the remaining balance of the acquisition price in the first quarter of
2009. In the event that Heilongjiang Weikang fails to pay the
remaining balance of the acquisition price the transaction could be deemed void
and Tiangfang will no longer be our operating business. Should
this occur, we may seek to acquire the equity interest of Tiangfang through
other means, although we cannot guarantee that we will do so, nor can we
guarantee that we will be successful if we do.
PRC
laws and regulations governing our business are uncertain. If we are found to be
in violation, we could be subject to sanctions. In addition, changes in such PRC
laws and regulations may materially and adversely affect our
business.
There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including, but not limited to, the laws and regulations
governing our business. We are considered a foreign person or foreign invested
enterprise under PRC law. As a result, we are subject to PRC law limitations on
foreign ownership of Chinese companies. These laws and regulations are
relatively new and may be subject to change, and their official interpretation
and enforcement may involve substantial uncertainty. The effectiveness of newly
enacted laws, regulations or amendments may be delayed, resulting in detrimental
reliance by foreign investors. New laws and regulations that affect existing and
proposed future businesses may also be applied retroactively.
The PRC
government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new PRC laws or regulations on our businesses. We
cannot assure you that our current ownership and operating structure would not
be found in violation of any current or future PRC laws or regulations. As a
result, we may be subject to sanctions, including fines, and could be required
to restructure our operations or cease to provide certain services. Any of these
or similar actions could significantly disrupt our business operations or
restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.
Risks
Related to Doing Business in China
Adverse
changes in economic and political policies of the PRC government could have a
material adverse effect on the overall economic growth of China, which could
adversely affect our business.
Substantially all of our business operations are conducted in China.
Accordingly, our results of operations, financial condition and prospects are
subject to a significant degree to economic, political and legal developments in
China. China's economy differs from the economies of most developed countries in
many respects, including with respect to the amount of government involvement,
level of development, growth rate, control of foreign exchange and allocation of
resources. While the PRC economy has experienced significant growth in the past
20 years, growth has been uneven across different regions and among various
economic sectors of China. The PRC government has implemented various measures
to encourage economic development and guide the allocation of resources. Some of
these measures benefit the overall PRC economy, but may also have a negative
effect on us. For example, our financial condition and results of operations may
be adversely affected by government control over capital investments or changes
in tax regulations that are applicable to us. Since early 2004, the PRC
government has implemented certain measures to control the pace of economic
growth. Such measures may cause a decrease in the level of economic activity in
China, which in turn could adversely affect our results of operations and
financial condition.
Uncertainties
with respect to the PRC legal system could adversely affect us.
We
conduct our business primarily through our affiliated Chinese entities, Weikang
and Tiangfang. Our operations in China are governed by PRC laws and
regulations. We are generally subject to laws and regulations applicable to
foreign investments in China and, in particular, laws applicable to wholly
foreign-owned enterprises. The PRC legal system is based on written statutes.
Prior court decisions may be cited for reference but have limited precedential
value.
5
Since
1979, PRC legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, the PRC legal system is based in
part on government policies and internal rules (some of which are not published
on a timely basis or at all) that may have a retroactive effect. As a result, we
may not be aware of our violation of these policies and rules until some time
after the violation. In addition, any litigation in China may be protracted and
result in substantial costs and diversion of resources and management
attention.
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us, our management or the experts named in this
current report.
We
conduct substantially all of our operations in China and substantially all of
our assets are located in China. In addition, most of our senior executive
officers reside within China. As a result, it may not be possible to effect
service of process within the United States or elsewhere outside of China upon
our senior executive officers, including with respect to matters arising under
U.S. federal securities laws or applicable state securities laws. Moreover, our
PRC counsel has advised us that the PRC does not have treaties with the United
States or many other countries providing for the reciprocal recognition and
enforcement of judgment of courts.
Governmental
control of currency conversion may affect the value of your
investment.
The PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of China. We receive
substantially all of our revenues in RMB. Under our current structure, our
income is primarily derived from Weikang. Shortages in the availability of
foreign currency may restrict the ability of our PRC subsidiaries and our
affiliated entity to remit sufficient foreign currency to pay dividends or other
payments to us, or otherwise satisfy their foreign currency denominated
obligations. Under existing PRC foreign exchange regulations, payments of
current account items, including profit distributions, interest payments and
expenditures from trade-related transactions, can be made in foreign currencies
without prior approval from the PRC State Administration of Foreign Exchange by
complying with certain procedural requirements. However, approval from
appropriate government authorities is required where RMB is to be converted into
foreign currency and remitted out of China to pay capital expenses such as the
repayment of bank loans denominated in foreign currencies. The PRC government
may also, at its discretion, restrict access in the future to foreign currencies
for current account transactions. If the foreign exchange control system
prevents us from obtaining sufficient foreign currency to satisfy our currency
demands, we may not be able to pay dividends in foreign currencies to our
shareholders.
Fluctuation
in the value of RMB may have a material adverse effect on your
investment.
The value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
Our revenues and costs are mostly denominated in RMB, while a significant
portion of our financial assets are denominated in U.S. dollars. Our revenue is
based entirely on that generated by our affiliated entity in China. Any
significant fluctuation in value of RMB may materially and adversely affect our
cash flows, revenues, earnings and financial position, and the value of, and any
dividends payable on, our stock in U.S. dollars. For example, an appreciation of
RMB against the U.S. dollar would make any new RMB denominated investments or
expenditures more costly to us, to the extent that we need to convert U.S.
dollars into RMB for such purposes. An appreciation of RMB against the U.S.
dollar would also result in foreign currency translation losses for financial
reporting purposes when we translate our U.S. dollar denominated financial
assets into RMB, as RMB is our reporting currency.
We
face risks related to health epidemics and other outbreaks.
Our business could be adversely affected by the effects of SARS or another
epidemic or outbreak. China reported a number of cases of SARS in April 2004.
Any prolonged recurrence of SARS or other adverse public health developments in
China may have a material adverse effect on our business operations. For
instance, health or other government regulations adopted in response may require
temporary closure of our production facilities or of our offices. Such closures
would severely disrupt our business operations and adversely affect our results
of operations. We have not adopted any written preventive measures or
contingency plans to combat any future outbreak of SARS or any other
epidemic.
Risks
Related to an Investment in Our Securities
To
date, we have not paid any cash dividends and no cash dividends will be paid in
the foreseeable future.
We do not
anticipate paying cash dividends on our common stock in the foreseeable future
and we may not have sufficient funds legally available to pay dividends. Even if
the funds are legally available for distribution, we may nevertheless decide not
to pay any dividends. We intend to retain all earnings from our
operations.
6
The
application of the "penny stock" rules could adversely affect the market price
of our common stock and increase your transaction costs to sell those
shares.
As long
as the trading price of our common shares is below $5 per share, the open-market
trading of our common shares will be subject to the "penny stock" rules. The
"penny stock" rules impose additional sales practice requirements on
broker-dealers who sell securities to persons other than established customers
and accredited investors (generally those with assets in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of securities and have received the
purchaser's written consent to the transaction before the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
broker-dealer must deliver, before the transaction, a disclosure schedule
prescribed by the Securities and Exchange Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability or decrease the willingness
of broker-dealers to sell our common shares, and may result in decreased
liquidity for our common shares and increased transaction costs for sales and
purchases of our common shares as compared to other securities.
Our
common shares are thinly traded and, you may be unable to sell at or near ask
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
We cannot
predict the extent to which an active public market for our common stock will
develop or be sustained. However, we do not rule out the possibility of applying
for listing on the Nasdaq National Market or other exchanges.
Our
common shares have historically been sporadically or "thinly-traded" on the
“Over-the-Counter Bulletin Board”, meaning that the number of persons interested
in purchasing our common shares at or near bid prices at any given time may be
relatively small or non-existent. This situation is attributable to a number of
factors, including the fact that we are a small company which is relatively
unknown to stock analysts, stock brokers, institutional investors and others in
the investment community that generate or influence sales volume, and that even
if we came to the attention of such persons, they tend to be risk-averse and
would be reluctant to follow an unproven company such as ours or purchase or
recommend the purchase of our shares until such time as we became more seasoned
and viable. As a consequence, there may be periods of several days or more when
trading activity in our shares is minimal or non-existent, as compared to a
seasoned issuer which has a large and steady volume of trading activity that
will generally support continuous sales without an adverse effect on share
price. We cannot give you any assurance that a broader or more active public
trading market for our common stock will develop or be sustained, or that
current trading levels will be sustained.
The
market price for our common stock is particularly volatile given our status as a
relatively small company with a small and thinly traded “float” and lack of
current revenues that could lead to wide fluctuations in our share price. The
price at which you purchase our common stock may not be indicative of the price
that will prevail in the trading market. You may be unable to sell your common
stock at or above your purchase price if at all, which may result in substantial
losses to you.
The
market for our common shares is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
The volatility in our share price is attributable to a number of factors. First,
as noted above, our common shares are sporadically and/or thinly traded. As a
consequence of this lack of liquidity, the trading of relatively small
quantities of shares by our shareholders may disproportionately influence the
price of those shares in either direction. The price for our shares could, for
example, decline precipitously in the event that a large number of our common
shares are sold on the market without commensurate demand, as compared to a
seasoned issuer which could better absorb those sales without adverse impact on
its share price. Secondly, we are a speculative or "risky" investment due to our
lack of revenues or profits to date and uncertainty of future market acceptance
for our current and potential products. As a consequence of this enhanced risk,
more risk-adverse investors may, under the fear of losing all or most of their
investment in the event of negative news or lack of progress, be more inclined
to sell their shares on the market more quickly and at greater discounts than
would be the case with the stock of a seasoned issuer. The following factors may
add to the volatility in the price of our common shares: actual or anticipated
variations in our quarterly or annual operating results; adverse outcomes,
additions or departures of our key personnel, as well as other items discussed
under this "Risk Factors" section. Many of these factors are beyond our control
and may decrease the market price of our common shares, regardless of our
operating performance. We cannot make any predictions or projections as to what
the prevailing market price for our common shares will be at any time, including
as to whether our common shares will sustain their current market prices, or as
to what effect that the sale of shares or the availability of common shares for
sale at any time will have on the prevailing market price.
7
Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include (1) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups by
selling broker-dealers; and (5) the wholesale dumping of the same securities by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. Although we do not expect to be
in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.
Volatility
in our common share price may subject us to securities litigation.
The
market for our common stock is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
In the past, plaintiffs have often initiated securities class action litigation
against a company following periods of volatility in the market price of its
securities. We may, in the future, be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management's attention and resources.
Our
corporate actions are substantially controlled by a single
stockholder.
As a
result of the share exchange transaction with Sinary, the Sinary Stockholder
currently owns approximately 89% of our outstanding common shares, representing
approximately 89% of our voting power. This stockholder could exert substantial
influence over matters such as electing directors and approving mergers or other
business combination transactions. In addition, because of the percentage of
ownership and voting concentration in the principal stockholder, elections of
our board of directors will generally be within the control of this stockholder.
While all of our shareholders are entitled to vote on matters submitted to our
shareholders for approval, the concentration of shares and voting control
presently lies with this principal stockholder. As such, it would be extremely
difficult for shareholders to propose and have approved proposals not supported
by the Sinary Stockholder. There can be no assurances that matters voted upon by
the Sinary Stockholder will be viewed favorably by all shareholders of our
company.
The
elimination of monetary liability against our directors, officers and employees
under Nevada law and the existence of indemnification rights to our directors,
officers and employees may result in substantial expenditures by us and may
discourage lawsuits against our directors, officers and employees.
Our
articles of incorporation contain specific provisions that eliminate the
liability of our directors for monetary damages to our company and shareholders,
and we are prepared to give such indemnification to our directors and officers
to the extent provided by Nevada law. The foregoing indemnification obligations
could result in our company incurring substantial expenditures to cover the cost
of settlement or damage awards against directors and officers, which we may be
unable to recoup. These provisions and resultant costs may also discourage our
company from bringing a lawsuit against directors and officers for breaches of
their fiduciary duties, and may similarly discourage the filing of derivative
litigation by our shareholders against our directors and officers even though
such actions, if successful, might otherwise benefit our company and
shareholders.
Legislative
actions, higher insurance costs and potential new accounting pronouncements may
impact our future financial position and results of operations.
There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results of
operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well as
proposed legislative initiatives following the Enron bankruptcy are likely to
increase general and administrative costs and expenses. In addition, insurers
are likely to increase premiums as a result of high claims rates over the past
several years, which we expect will increase our premiums for insurance
policies. Further, there could be changes in certain accounting rules. These and
other potential changes could materially increase the expenses we report under
generally accepted accounting principles, and adversely affect our operating
results.
The
market price for our stock may be volatile.
The
market price for our stock may be volatile and subject to wide fluctuations in
response to factors including the following:
·
|
actual or anticipated
fluctuations in our quarterly operating
results;
|
·
|
changes in financial estimates by
securities research
analysts;
|
·
|
conditions in pharmaceutical and
agricultural markets;
|
8
·
|
changes in the economic
performance or market valuations of other pharmaceutical
companies;
|
·
|
announcements by us or our
competitors of new products, acquisitions, strategic partnerships, joint
ventures or capital
commitments;
|
·
|
addition or departure of key
personnel;
|
·
|
fluctuations of exchange rates
between RMB and the U.S.
dollar;
|
·
|
intellectual property
litigation;
|
·
|
general economic or political
conditions in China.
|
In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our stock.
We
may need additional capital, and the sale of additional shares or other equity
securities could result in additional dilution to our shareholders.
We
believe that our current cash and cash equivalents, anticipated cash flow from
operations and the net proceeds from the private offering of 1,470,588 shares of
the Company’s common stock on January 20, 2010 will be sufficient to meet our
anticipated cash needs for the near future. We may, however, require additional
cash resources due to changed business conditions or other future developments,
including any investments or acquisitions we may decide to pursue. If our
resources are insufficient to satisfy our cash requirements, we may seek to sell
additional equity or debt securities or obtain a credit facility. The sale of
additional equity securities could result in additional dilution to our
shareholders. The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financing covenants that
would restrict our operations. We cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all.
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud.
We are
subject to reporting obligations under the U.S. securities laws. The Securities
and Exchange Commission, or the SEC, as required by Section 404 of the
Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to
include a management report on such company's internal controls over financial
reporting in its annual report, which contains management's assessment of the
effectiveness of our internal controls over financial reporting. In addition, an
independent registered public accounting firm must attest to and report on
management's assessment of the effectiveness of our internal controls over
financial reporting. Our management may conclude that our internal controls over
our financial reporting are not effective. Moreover, even if our management
concludes that our internal controls over financial reporting are effective, our
independent registered public accounting firm may still decline to attest to our
management's assessment or may issue a report that is qualified if it is not
satisfied with our controls or the level at which our controls are documented,
designed, operated or reviewed, or if it interprets the relevant requirements
differently from us. Our reporting obligations as a public company will place a
significant strain on our management, operational and financial resources and
systems for the foreseeable future. Effective internal controls, particularly
those related to revenue recognition, are necessary for us to produce reliable
financial reports and are important to help prevent fraud. As a result, our
failure to achieve and maintain effective internal controls over financial
reporting could result in the loss of investor confidence in the reliability of
our financial statements, which in turn could harm our business and negatively
impact the trading price of our stock. Furthermore, we anticipate that we will
incur considerable costs and use significant management time and other resources
in an effort to comply with Section 404 and other requirements of the
Sarbanes-Oxley Act.
Declining
economic conditions could negatively impact our business
Our
operations are affected by local, national and worldwide economic
conditions. Markets in the United States and elsewhere have been
experiencing extreme volatility and disruption for more than 12 months, due in
part to the financial stresses affecting the liquidity of the banking system and
the financial markets generally. In recent months, this volatility
and disruption has reached unprecedented levels. The consequences of
a potential or prolonged recession may include a lower level of economic
activity and uncertainty regarding energy prices and the capital and commodity
markets. Instability in the financial markets, as a result of
recession or otherwise, also may affect the cost of capital and our ability to
raise capital.
9
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of
the statements under “Prospectus Summary,” “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
“Business,” and elsewhere in this prospectus constitute forward-looking
statements. These statements involve risks known to us, significant
uncertainties, and other factors which may cause our actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by those forward-looking statements.
You can
identify forward-looking statements by the use of the words “may,” “will,”
“should,” “could,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “intends,” “potential,” “proposed,” or “continue” or
the negative of those terms. These statements are only predictions. In
evaluating these statements, you should specifically consider various factors,
including the risks outlined above. These factors may cause our actual results
to differ materially from any forward-looking statement.
Although
we believe that the exceptions reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements.
USE
OF PROCEEDS
We will
not receive any proceeds from the sale of our common stock by the Selling
Stockholders. However, we may receive the sale price of any common stock we sell
to the selling stockholders upon exercise of outstanding warrants.
Unless
otherwise indicated in the applicable prospectus supplement, we anticipate that
any net proceeds from the sale of stock we sell to the selling stockholders upon
exercise of outstanding warrants will be used for general corporate purposes.
Such general purposes may include acquisitions, investments, repayment of debt,
capital expenditures, repurchase of our capital stock and any other purposes
that we may specify in any prospectus supplement. We may invest the net proceeds
temporarily until we use them for their stated purpose.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
WKBT
common stock is quoted on the Over-the-Counter Electronic Bulletin Board under
the symbol “WKBT.OB”. Presented below is the high and low bid information of
Weikang’s common stock for the periods indicated. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. No bid quotations were available for any of
quarterly periods for the year ended December 31, 2007.
Year
Ended December 31, 2008:
|
High
|
Low
|
||||||
3/31/2008
|
$ | 0.60 | $ | 0.60 | ||||
6/30/2008
|
$ | 1.15 | $ | 1.15 | ||||
9/30/2008
|
$ | 1.15 | $ | 1.15 | ||||
12/31/2008
|
$ | 1.04 | $ | 1.04 | ||||
Year
Ended December 31, 2009:
|
High
|
Low
|
||||||
3/31/2009
|
$ | 1.04 | $ | 1.04 |
6/30/2009
|
$ | 2.00 | $ | 0.51 | ||||
9/30/2009
|
$ | 3.00 | $ | 0 | ||||
12/31/2009
|
$ | 3.05 | $ | 1.65 |
Our
common shares are issued in registered form. Florida Atlantic Stock
Transfer Inc. (Telephone: 954-726-4954; Facsimile: 954-726-6305) is
the registrar and transfer agent for our common shares.
2008
Stock Incentive Plan
On June
24, 2008, our Board of Directors approved a 2008 Stock Incentive Plan for our
employees, officers, and directors, and our consultants and advisors. We also
filed a related Form S-8 with the SEC. The company has issued 297,000 shares
pursuant to 2008 Stock Incentive Plan. As of December 31, 2009, we
had no shares issued pursuant to 2008 Stock Incentive Plan.
Holders
As
of January 31, 2010, there were approximately 33 holders of record of our
common stock.
10
Dividends
We have
not declared any dividends since incorporation and do not anticipate that we
will do so in the foreseeable future. Although there are no restrictions that
limit the ability to pay dividends on our common shares, our intention is to
retain future earnings for use in our operations and the expansion of our
business.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis is based on, and should be read in conjunction
with our audited historical consolidated financial statements, which are
included elsewhere in this Prospectus. Management’s Discussion and Analysis of
Financial Condition and Results of Operations contains statements that are
forward-looking. These statements are based on current expectations and
assumptions that are subject to risk, uncertainties and other factors. Actual
results could differ materially because of the factors discussed in “Risks
Factors” above and elsewhere in this Prospectus, and other factors that we may
not know. All amounts are expressed in United States dollars.
Overview
Weikang
Bio-Technology Company, Inc. (“we”, “us”, the “Company”) was incorporated in
Florida on May 12, 2004 as Expedition Leasing, Inc. On December 7, 2007, we
acquired Sinary Bio-Technology Holdings Group, Inc. (or Sinary), a Nevada
corporation and, as a result, Sinary’s wholly-owned subsidiary Heilongjiang
Weikang Bio-Technology Group Co., Ltd. (or Heilongjiang Weikang), a limited
liability company in the People’s Republic of China (or PRC), by exchanging
24,725,200 shares of our common stock for 100% of the issued and outstanding
common stock of Sinary.
Having no
substantive operation of its own, Sinary, through Heilongjiang Weikang, engages
in the research, development, manufacturing, marketing, and sales
of Traditional Chinese Medicine (or TCM) in China. Heilongjiang
Weikang is located in Heilongjiang Province in Northeastern China, with our
principal office and manufacturing facility located in the Economic and
Technology Development Zone in the city of Shuangcheng, approximately 42
kilometers south of the provincial capital Harbin. All of our products are
Chinese herbal-based health and nutritional supplements. We actively seek to
maintain and improve the quality of our products, and as of April 2006, we have
implemented the “GB/T19001-2000 idt ISO9001:2000” quality assurance management
system to all of our manufacturing processes.
Through
our subsidiary Heilongjiang Weikang, we manufacture and distribute throughout
China a series of internally developed TCM under a Chinese trade name,
“Rongrun”. The “Rongrun” line presently includes seven products. We also
developed two new products during 2007, which were approved by the Heilongjiang
Department of Health.
On July
22, 2008, Heilongjiang Weikang acquired 100% of the issued and outstanding
equity interest of Tianfang (Guizhou) Pharmaceutical Co., Ltd. (or Tianfang), a
Chinese limited liability company, for $15,000,000, pursuant to a Stock Transfer
Agreement dated and entered into on June 30, 2008 by and among Heilongjiang
Weikang, Tianfang, and Tianfang’s two shareholders, Beijing Shiji Qisheng
Trading Co., Ltd. and Tri-H Trade (U.S.A.) Co., Ltd.
Tianfang
was incorporated in Guizhou Province, PRC in 1998. Tianfang is
engaged in the development, manufacture and distribution of over-the-counter
pharmaceuticals.
Critical
Accounting Policies and Estimates
Our
management's discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which were
prepared in accordance with accounting principles generally accepted in the
United States (or US GAAP). The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements as well as the reported net
sales and expenses during the reporting periods. On an ongoing basis, we
evaluate our estimates and assumptions. We base our estimates on historical
experience and on various other factors that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
While our
significant accounting policies are more fully described in Note 2 to our
consolidated financial statements, we believe the following accounting policies
are the most critical to aid you in fully understanding and evaluating this
management discussion and analysis.
11
Basis
of presentation
These
accompanying consolidated financial statements have been prepared in accordance
with US GAAP and pursuant to the rules and regulations of the Securities and
Exchange Commission (or SEC) for annual or quarterly financial
statements.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Sinary, and the results of operations
of Heilongjiang Weikang, Sinary’s wholly-owned subsidiary; and Tianfang,
Heilongjiang Weikang’s wholly-owned subsidiary. All significant
inter-company accounts and transactions have been eliminated in
consolidation.
Accounts
Receivable
The
Company’s policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves.
Inventories
Inventories
are valued at the lower of cost or market with cost determined on a moving
weighted average basis. Cost of work in progress and finished goods comprises
direct material, direct production cost and an allocated portion of production
overheads.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures
for maintenance and repairs are expensed as incurred; additions, renewals and
betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in operations.
Depreciation of property and equipment is provided using the straight-line
method for all assets with estimated lives ranging from 3 to 20 years as
follows:
Building
|
20
years
|
Vehicle
|
5
years
|
Office
Equipment
|
3-7
years
|
Production
Equipment
|
3-10
years
|
Revenue
Recognition
The
Company's revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin (“SAB”) 104, codified in FASB ASC Topic 480. Sales revenue
is recognized at the date of shipment to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no other
significant obligations of the Company exist and collectability is
reasonably assured. Payments received before all of the relevant criteria for
revenue recognition are recorded as unearned revenue.
Sales
revenue represents the invoiced value of goods, net of value-added tax (or VAT).
All of the Company’s products sold in the PRC are subject to Chinese value-added
tax of 17% of the gross sales price. This VAT may be offset by VAT paid by the
Company on raw materials and other materials included in the cost of producing
their finished product. The Company recorded VAT payable and VAT receivable net
of payments in the financial statements. The VAT tax return is filed offsetting
the payables against the receivables.
Foreign
Currency Translation and Comprehensive Income (Loss)
The
Company’s functional currency is the Renminbi (or RMB). For financial reporting
purposes, RMB were translated into United States dollars (or USD) as the
reporting currency. Assets and liabilities are translated at the exchange rate
in effect at the balance sheet date. Revenues and expenses are translated at the
average rate of exchange prevailing during the reporting period. Translation
adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders' equity as "Accumulated other
comprehensive income". Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant fluctuation
in exchange rate for the conversion of RMB to USD after the balance sheet
date.
12
The
Company uses SFAS No 130, “Reporting Comprehensive Income”, codified in FASB ASC
Topic 220. Comprehensive income is comprised of net income and all changes to
the statements of stockholders’ equity, except those due to investments by
stockholders, changes in paid-in capital and distributions to
stockholders.
NEW
ACCOUNTING PRONOUNCEMENTS
On July
1, 2009, the Company adopted Accounting Standards Update (“ASU”) No.
2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments
based on Statement of Financial Accounting Standards No. 168 , “The FASB
Accounting Standards Codification™ and the Hierarchy of Generally Accepted
Accounting Principles” (“ASU No. 2009-01”). ASU No. 2009-01
re-defines authoritative GAAP for nongovernmental entities to be only comprised
of the FASB Accounting Standards Codification™ (“Codification”) and, for SEC
registrants, guidance issued by the SEC. The Codification is a
reorganization and compilation of all then-existing authoritative GAAP for
nongovernmental entities, except for guidance issued by the SEC. The
Codification is amended to effect non-SEC changes to authoritative
GAAP. Adoption of ASU No. 2009-01 only changed the referencing
convention of GAAP in Notes to the Consolidated Financial
Statements.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (“SFAS 167”), codified as FASB ASC Topic 810-10, which modifies how a
company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. SFAS 167
clarifies that the determination of whether a company is required to consolidate
an entity is based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly
impact the entity’s economic performance. SFAS 167 requires an ongoing
reassessment of whether a company is the primary beneficiary of a variable
interest entity. SFAS 167 also requires additional disclosures about a company’s
involvement in variable interest entities and any significant changes in risk
exposure due to that involvement. SFAS 167 is effective for fiscal years
beginning after November 15, 2009. The Company does not believe the adoption of
SFAS 167 will have an impact on its financial condition, results of operations
or cash flows.
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets — an amendment of FASB Statement No. 140” (“SFAS 166”), codified as FASB
Topic ASC 860, which requires entities to provide more information regarding
sales of securitized financial assets and similar transactions, particularly if
the entity has continuing exposure to the risks related to transferred financial
assets. SFAS 166 eliminates the concept of a “qualifying special-purpose
entity,” changes the requirements for derecognizing financial assets and
requires additional disclosures. SFAS 166 is effective for fiscal years
beginning after November 15, 2009. The Company does not believe the adoption of
SFAS 166 will have an impact on its financial condition, results of operations
or cash flows.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”) codified in
FASB ASC Topic 855-10-05, which provides guidance to establish general standards
of accounting for and disclosures of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
SFAS 165 also requires entities to disclose the date through which subsequent
events were evaluated as well as the rationale for why that date was selected.
SFAS 165 is effective for interim and annual periods ending after June 15, 2009,
and accordingly, the Company adopted this pronouncement during the second
quarter of 2009. SFAS 165 requires that public entities evaluate subsequent
events through the date that the financial statements are issued. The Company
has evaluated subsequent events through November 18, 2009.
In April
2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1, “Interim Disclosures
about Fair Value of Financial Instruments,” which is codified in FASB ASC Topic
825-10-50. This FSP essentially expands the disclosure about fair value of
financial instruments that were previously required only annually to also be
required for interim period reporting. In addition, the FSP requires certain
additional disclosures regarding the methods and significant assumptions used to
estimate the fair value of financial instruments. These additional disclosures
are required beginning with the quarter ending June 30, 2009. This FSP had no
material impact on the Company’s financial position, results of operations or
cash flows.
In
April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition
and Presentation of Other-Than-Temporary Impairments,” which is codified in FASB
ASC Topic 320-10. This FSP modifies the requirements for recognizing
other-than-temporarily impaired debt securities and changes the existing
impairment model for such securities. The FSP also requires additional
disclosures for both annual and interim periods with respect to both debt and
equity securities. Under the FSP, impairment of debt securities will be
considered other-than-temporary if an entity (1) intends to sell the security,
(2) more likely than not will be required to sell the security before recovering
its cost, or (3) does not expect to recover the security’s entire amortized cost
basis (even if the entity does not intend to sell). The FSP further indicates
that, depending on which of the above factor(s) causes the impairment to be
considered other-than-temporary, (1) the entire shortfall of the security’s fair
value versus its amortized cost basis or (2) only the credit loss portion would
be recognized in earnings while the remaining shortfall (if any) would be
recorded in other comprehensive income. FSP 115-2 requires entities to initially
apply the provisions of the standard to previously other-than-temporarily
impaired debt securities existing as of the date of initial adoption by making a
cumulative-effect adjustment to the opening balance of retained earnings in the
period of adoption. The cumulative-effect adjustment potentially reclassifies
the noncredit portion of a previously other-than-temporarily impaired debt
security held as of the date of initial adoption from retained earnings to
accumulate other comprehensive income. The Company adopted FSP No. SFAS 115-2
and SFAS 124-2 beginning April 1, 2009. This FSP had no material impact on the
Company’s financial position, results of operations or cash
flows.
13
In April
2009, the Financial Accounting Standards Board (“FASB”) issued FSP
No. SFAS 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly” (“FSP No. SFAS 157-4”). FSP
No. SFAS 157-4, which is codified in FASB ASC Topics 820-10-35-51 and
820-10-50-2, provides additional guidance for estimating fair value and
emphasizes that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the same.
The Company adopted FSP No. SFAS 157-4 beginning April 1, 2009.
This FSP had no material impact on the Company’s financial position, results of
operations or cash flows.
Three
and Nine Months Ended September 30, 2009 Compared to September 30,
2008:
Results
of Operations
Comparison
of the Nine Months Ended September 30, 2009 and 2008
The
following table summarizes our results of operations. The table and the
discussion below should be read in conjunction with the unaudited financial
statements and the notes thereto appearing elsewhere in this
prospectus.
2009
|
2008
|
|||||||||||||||
(in
U.S. Dollars, except for percentages)
|
||||||||||||||||
Sales
|
$ | 34,534,249 | $ | 6,651,947 | ||||||||||||
Cost
of Sales
|
15,803,400 | 46 | % | 2,214,935 | 33 | % | ||||||||||
Gross
Profit
|
18,730,849 | 54 | % | 4,437,012 | 67 | % | ||||||||||
Operating
Expense
|
4,446,576 | 13 | % | 587,714 | 9 | % | ||||||||||
Income
from Operations
|
14,284,273 | 41 | % | 3,849,298 | 58 | % | ||||||||||
Other
Income (Expenses), net
|
735,200 | 2 | % | (4,648 | ) | 0 | % | |||||||||
Income
Tax Expenses
|
3,853,312 | 11 | % | 352,255 | 5 | % | ||||||||||
Net
Income
|
$ | 11,166,161 | 32 | % | $ | 3,492,395 | 53 | % |
Sales. During the nine months
ended September 30, 2009, we had sales of $34.53 million, compared to $6.65
million for the comparable period of 2008, an increase of $27.88 million or
419%. The increase in sales was primarily a result of our acquisition of
Tianfang, which brought us about $24.14 million sales or 70% of our sales during
the nine months of 2009. This increase in sales was also attributable
to 1) increased demand from our dealers and distributors as a result of
increased acceptance and trust in our products from end users which increased
Weikang’s sales by 115% during the nine months ended September 30, 2009 compared
with comparable period of 2008. 2) Since July 2008, Tianfang’s
sale has been continuously growing due to Weikang’s existing market
channel. We believe our sales will continue to grow as we develop new
products and continue to improve the quality of our existing
products.
Cost of Sales. Cost of
sales increased $13.59 million or 613%, from $2.21 million in the nine months
ended September 30, 2008 to $15.80 million for the nine months ended September
30, 2009. The increase was mainly due to increased production as a result of our
acquisition of Tianfang and increased demand from the end users. The cost
of sales as a percentage of sales for the nine months ended September 30, 2009,
approximated 46% as compared to 33% for the comparable period of 2008, which was
attributable to relatively higher cost of sales of Tianfang, approximating 51%
of sales, while the cost of sales was approximately 33% of the sales for
Heilongjiang Weikang, this was mainly due to Tianfang focusing on manufacturing
popular products with relatively higher cost to meet customers’ demand and
expanding its market share in the new regions with popular products. When the
market becomes stable, we will launch new products to replace the low profit
margin products.
Gross Profit. Gross profit
was $18.73 million for the nine months ended September 30, 2009, compared to
$4.44 million for the comparable period of 2008, representing margins of 54% and
67% of sales, respectively. The decrease in our margin was mainly due to
increase in cost of sales as a percentage of sales as a result of relatively
high cost of sales from Tianfang’s operations during the nine months of
2009.
14
Operating Expenses. Total
operating expenses consisted of selling, general and administrative expenses of
$4.45 million for the nine months ended September 30, 2009 compared to $0.59
million for the nine months ended September 30, 2008, an increase of $3.86
million or 657%. Operating expenses as a percentage of sales was 13% for the
nine months ended September 30, 2009 while it was 9% for the comparable period
of 2008. This increase was attributable to the combined expenses of Heilongjiang
Weikang and Tianfang due to the acquisition of Tianfang in July 2008. In
addition, we had R&D expense of approximately $1.9 million in 2009 for
developing certain new medicine and health supplemental products with the Botany
medicine research center of Northeast Forestry University.
Net Other Income
(Expenses). Other income was $0.74 million in the nine months ended
September 30, 2009 compared to other expense of $4,648 in the nine months ended
September 30, 2008. Other income in the nine months of 2009 mainly
consisted of lease income received from leasing a workshop and right to use our
technology for manufacturing the royal jelly.
Net Income. Our net income
for the nine months ended September 30, 2009 was $11.17 million compared to
$3.49 million for the nine months ended September 30, 2008, an increase of $7.67
million or 220%. The increase was mainly attributed to growth
in revenue and efficiency of operations. Our management believes net income will
continue to increase as we continue to offer better quality and variety of
products and continue to improve our manufacturing efficiency.
Comparison
of the Three Months Ended September 30, 2009 and 2008
The
following table summarizes our results of operations. The table and the
discussion below should be read in conjunction with the unaudited financial
statements and the notes thereto appearing elsewhere in this
prospectus.
2009
|
2008
|
|||||||||||||||
(in
U.S. Dollars, except for percentages)
|
||||||||||||||||
Sales
|
$
|
11,227,275
|
$
|
3,452,049
|
||||||||||||
Cost
of Sales
|
5,238,634
|
47
|
%
|
1,048,897
|
30
|
%
|
||||||||||
Gross
Profit
|
5,988,642
|
53
|
%
|
2,403,152
|
70
|
%
|
||||||||||
Operating
Expense
|
842,678
|
7
|
%
|
214,292
|
6
|
%
|
||||||||||
Income
from Operations
|
5,145,964
|
46
|
%
|
2,188,860
|
63
|
%
|
||||||||||
Other
Income (Expenses), net
|
247,104
|
2
|
%
|
(3,502)
|
0
|
%
|
||||||||||
Income
Tax Expenses
|
1,414,837
|
13
|
%
|
352,255
|
10
|
%
|
||||||||||
Net
Income
|
$
|
3,978,232
|
35
|
%
|
$
|
1,833,103
|
53
|
%
|
Sales. During the three
months ended September 30, 2009, we had sales of $11.22 million, compared to
$3.45 million for the comparable period of 2008, an increase of $7.78 million or
225%. This increase was attributable to 1) increased demand from our
dealers and distributors as a result of increased acceptance and trust in our
products from end users; 2) increased selling price to dealers and distributors
of Heilongjiang Weikang as a result of increased demand from end users and 3)
increased sales from Tianfang as a result of its successful expansion on the
market share in the new regions. We believe our sales will continue to grow as
we develop new products and continue to improve the quality of our existing
products.
Cost of Sales. Cost of
sales increased $4.19 million or 399%, from $1.05 million in the three months
ended September 30, 2008 to $5.24 million for the three months ended September
30, 2009. The increase was mainly due to increased sales. The cost of sales
as a percentage of sales for the three months ended September 30, 2009, was 47%
compared to 30% for the comparable period of 2008, which was attributable to
relatively higher cost of sales of Tianfang, approximately 51% of sales, this
was mainly due to sale of high cost products to meet customers’ demand for
expanding the market share in the new regions of China; while the cost of sales
was 33% of the sales for Heilongjiang Weikang, a decrease of 4% compared with
the comparable period of 2008, which was mainly due to economies of scale with
increased production volume while fixed costs remain constant.
Gross Profit. Gross profit
was $5.99 million for the three months ended September 30, 2009, compared to
$2.40 million for the comparable period of 2008, representing margins of 53% and
70% of sales, respectively. The decrease in our margin was mainly due to
increase in cost of sales as a percentage of sales as a result of relatively
high cost of sales from Tianfang’s operations during the third quarter of
2009.
Operating Expenses. Total
operating expenses consisted of selling, general and administrative expenses of
$0.84 million for the three months ended September 30, 2009 compared to $0.21
million for the three months ended September 30, 2008, an increase of $0.63
million or 293%. This increase was attributable to the combined expenses of
Heilongjiang Weikang and Tianfang due to the acquisition of Tianfang in July of
2008. Operating expenses as a percentage of sales was 7% for the
three months ended September 30, 2009 while it was 6% for the comparable period
of 2008. The increase was mainly due increased marketing expense of Tianfang for
expanding its market share in the new regions of China.
15
Net Other Income
(Expenses). Other income was $0.25 million in the three months ended
September 30, 2009 compared to other expense of $3,502 in the three months ended
September 30, 2008. Other income in the third quarter of 2009 mainly
consisted of lease income received from leasing a workshop and right to use our
technology for manufacturing the royal jelly.
Net Income. Our net income
for the three months ended September 30, 2009 was $3.98 million compared to net
income of $1.83 million for the three months ended September 30, 2008, an
increase of $2.15 million or 117%. The increase was mainly attributed to
growth in revenue and efficiency of operations. Our management believes net
income will continue to increase as we continue to offer better quality and
variety of products and continue to improve our manufacturing
efficiency.
Fiscal
Years Ended December 31, 2008 Compared to December 31, 2007:
Results
of Operations
Comparison
of the Years Ended December 31, 2008 and the four months ended December 31,
2007
On
October 25, 2007, Sinary entered into an equity interests transfer agreement
with the owners of Heilongjiang Weikang to acquire 100% of the equity interests
of Heilongjiang Weikang for the sum of 57 million RMB, or approximately 7.6
million US dollars.
On July
22, 2008, Heilongjiang Weikang completed the acquisition of 100% of the issued
and outstanding equity interests of Tianfang for the aggregate purchase price of
$15,000,000.
The
following table summarizes our results of operations. The table and the
discussion below should be read in conjunction with the audited financial
statements and the notes thereto appearing elsewhere in this
prospectus.
Year
Ended
December 31, 2008
|
From
Inception August 31
to
December 31, 2007
|
|||||||||||||||
(in
U.S. Dollars, except for percentages)
|
||||||||||||||||
Sales
|
$
|
12,852,884
|
100
|
%
|
$
|
823,602
|
100
|
%
|
||||||||
Cost
of Sales
|
$
|
4,584,093
|
36
|
%
|
$
|
390,523
|
47
|
%
|
||||||||
Gross
Profit
|
$
|
8,268,791
|
64
|
%
|
$
|
433,079
|
53
|
%
|
||||||||
Operating
Expense
|
$
|
1,208,998
|
9
|
%
|
$
|
229,622
|
28
|
%
|
||||||||
Income
from Operations
|
$
|
7,059,793
|
55
|
%
|
$
|
203,457
|
25
|
%
|
||||||||
Other
Income (Expenses), net
|
$
|
959,735
|
7.5
|
%
|
$
|
(653,844)
|
(79
|
)%
|
||||||||
Income
Tax Expenses
|
$
|
748,919
|
6
|
%
|
$
|
-
|
-
|
%
|
||||||||
Net
Income (Expenses)
|
$
|
7,270,609
|
57
|
%
|
$
|
(450,387)
|
(55
|
)%
|
Sales. During the year ended
December 31, 2008, we had sales of $12.85 million (taking into account of twelve
months sales of Heilongjiang Weikang and five months sales of Tianfang
since the acquisition date), as compared to revenues of $0.82 million from
inception of Sinary on August 31, 2007 to December 31, 2007, an increase of
approximately $12.03 million or 1461%. This increase was attributable to
increased demand from our dealers and distributors and combined operations of
Heilongjiang Weikang and Tianfang following the acquisition of 100% of Tianfang
by Weikang on July 22, 2008. We believe that our sales will continue to grow as
we develop new products and continue to improve the quality of our existing
products.
Cost of Sales. Cost of
sales increased $4.19 million or 1074%, from $0.39 million since inception of
Sinary on August 31, 2007 to December 31, 2007 to $4.58 million for year 2008
(taking into account of twelve months operation of Heilongjiang Weikang and
five months operation of Tianfang since the acquisition of Tianfang). The
increase was mainly due to increased production and sales activities of
Heilongjiang Weikang in 2008 combined with Tianfang’s sales and production since
July 22, 2008. We had a decrease in cost of sales as a percentage of
sales for 2008, approximately 36% as compared to approximately 47% for the
period from August 31 to December 31, 2007, which was attributable to increased
production volume with decreased average production cost as a result of economy
of scale.
Gross Profit. Gross profit
was $8.27 million for 2008 (taking into account of twelve months operation
of Heilongjiang Weikang and five months operation of Tianfang since the
acquisition date) as compared to $0.43 million for the period from August 31 to
December 31, 2007, representing gross margins of approximately 64% and 53% of
revenues, respectively. The increase in our gross profits was mainly due to
decrease in cost of sales as a percentage of sales as a result of economies of
scale.
16
Operating Expenses. Total
operating expenses consists of selling, general and administrative expenses of
$1.21 million for 2008 as compare to $0.23 million for the period from August 31
to December 31, 2007, an increase of $0.98 million or 427%. This increase was
attributable to the combined expenses in 2008 of Heilongjiang Weikang and
Tianfang since the acquisition of Tianfang, while only Heilongjiang Weikang’s
expenses were taken into account for 2007 since the acquisition of Heilongjiang
Weikang by Sinary on October 25, 2007. Operating expenses as a
percentage to sales was 9% for 2008 while it was 28% for the four months of
2007, which mainly due to the economies of scale coupled with the
efficient control on the expenses by the management.
Net Other Income (Expenses).
Other income was $0.96 million for 2008 while there was other expense of
$0.65 million in the four months of 2007. Other income in 2008 mainly
consisted of lease income of $1.03 million received from leasing out a workshop
and use right of the technology of manufacturing the royal
jelly. Other expenses in 2007 mainly consisted of the payment of
$0.65 million on the reverse acquisition by Sinary on December 7,
2007.
Net Income. Our net income
for 2008 was $7.27 million as compared to net loss of $0.45 million during the
period from August 31 to December 31, 2007. Net loss in the period of 2007 was
mainly attributable to a payment made for $0.65 million on the reverse
acquisition by Sinary on December 7, 2007. Net income in 2008 was due to
increased sales volume with decreased average production cost as well as
combined efficient operation of Heilongjiang Weikang and Tianfang since the
acquisition of Tianfang. We also continued to benefit from our exemption from
income tax for Heilongjiang Weikang. Our management believes that net income
will continue to increase as we continue to offer better quality and more
variety of products and to improve our manufacturing efficiency.
CONSOLIDATED
FINANCIAL CONDITION AND LIQUIDITY
Liquidity
and Capital Resources
As of
September 30, 2009, the Company had cash and cash equivalents of $8.71 million,
other current assets of $1.02 million, and current liabilities of $9.77 million.
Negative working capital was $46,218 at September 30, 2009. The ratio of current
assets to current liabilities was 0.99-to-1 as of September
30, 2009.
The
negative working capital and the ratio of current assets to current liabilities
are primarily due to other payables of $7.62 million that Sinary is obligated to
pay to the prior owners of Heilongjiang Weikang within one year from the closing
of the acquisition of Heilongjiang Weikang. This payable does not bear any
interest, and has been renewed to June 30, 2010.
The
following is a summary of cash provided by or used in each of the indicated
types of activities during the nine months ended September 30, 2009 and 2008,
respectively:
2009
|
2008
|
|||||||
Cash
provided by (used in):
|
||||||||
Operating
Activities
|
$
|
11,325,255
|
$
|
3,698,792
|
||||
Investing
Activities
|
$
|
(27,751
|
)
|
$
|
(78,638
|
)
|
||
Financing
Activities
|
$
|
(2,614,430)
|
$
|
(2,633,277
|
)
|
Net
cash provided by operating activities was $11.33 million for the nine months
ended September 30, 2009, compared to net cash provided by operating activities
of $3.70 million for the comparable period of 2008. The increase in net cash
inflow from operating activities was mainly due to an increase in our net income
with faster collection on accounts receivable.
Net
cash used in investing activities was $27,751 for the nine months ended
September 30, 2009, as compared to net cash used in investing activities of
$78,638 for the nine months ended September 30, 2008. The cash
outflow during the nine months ended September 30, 2009 was mainly due to the
acquisition of additional office equipment.
Net cash
used in financing activities was $2.61 million for the nine months ended
September 30, 2009 compared to net cash used in financing activities of
$2.63 million for the nine months ended September 30, 2008. The net cash outflow
in financing activities for the nine months ended September 30, 2009 mainly
consisted of payment of $3.81 million for the remaining portion of the
acquisition price of Tianfang, net of repayment of sales receipts of $1.20
million from the management that was previously deposited into a personal
bankcard owned by the Company’s officer mainly for the purpose of convenience on
payment collection. While in the comparable period of 2008, we paid
$4.87 million for the first and second installment for the acquisition price of
Tianfang, net of $2.46 million repayment of Weikang’s management for the sales
receipts that was originally received by Weikang’s management on behalf of
Weikang; and a repayment of $0.23 million to a related party.
17
We
do not believe inflation had a significant negative impact on our results of
operations during 2009.
Off-Balance
Sheet Arrangements
We
have not made any other financial guarantees or other commitments to guarantee
the payment obligations of any third party. We have not entered into any
derivative contracts that are indexed to our shares and classified as
stockholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit,
liquidity or market risk support to such entity. We do not have any variable
interest in any unconsolidated entity that provides financing, liquidity, market
risk or credit support to us or engages in leasing, hedging or research and
development services with us.
Quantitative
and Qualitative Disclosures about Market Risk
We
do not use derivative financial instruments in our investment portfolio and has
no foreign exchange contracts. Our financial instruments consist of cash and
cash equivalents, trade accounts receivable, accounts payable and long-term
obligations. We consider investments in highly liquid instruments purchased with
a remaining maturity of 90 days or less at the date of purchase to be cash
equivalents. However, in order to manage the foreign exchange risks, we may
engage in hedging activities to manage our financial exposure related to
currency exchange fluctuation. In these hedging activities, we might use
fixed-price, forward, futures, financial swaps and option contracts traded in
the over-the-counter markets or on exchanges, as well as long-term structured
transactions when feasible.
DESCRIPTION
OF BUSINESS
Overview
We are
principally engaged in developing, manufacturing and distributing health and
nutritional supplements in China. The Company has also expanded its business scope to
develop, manufacture and distribute Chinese herbal extract products and
GMP certified western prescriptive medicine.
History
As used
herein the terms "We", the "Company", "WKBT", the "Registrant," or the "Issuer"
refers to Weikang Bio-Technology Group Co., Inc., its subsidiaries and
predecessors, unless indicated otherwise. The Company was originally
incorporated on May 12, 2004 in the State of Florida as Expedition Leasing, Inc.
On July 12, 2008, the Company redomiciled from the State of Florida to the State
of Nevada and changed to its name to Weikang Bio-Technology Group Co., Inc.
pursuant to an acquisition of Sinary Bio-Technology Holdings Group, Inc.
(or Sinary), a Nevada corporation and, Sinary’s wholly owned subsidiary,
Heilongjiang Weikang Biotechnology Group Co., Ltd. (or Heilongjiang Weikang), a
limited liability company organized and existing under the laws of the People’s
Republic of China (or PRC). Upon completion of the transaction on December 7,
2007, Sinary and Heilongjiang Weikang became our wholly-owned subsidiary. The
transaction was treated for accounting purposes as a capital transaction and
recapitalization by the accounting acquirer and as a re-organization by the
accounting acquiree.
Overview
of Sinary
Sinary was incorporated under
the laws of the State of Nevada on August 31, 2007. On
October 25, 2007, Sinary entered into an equity interests transfer agreement
with the owners of Heilongjiang Weikang to acquire 100% of
the equity interests of Heilongjiang Weikang for the sum of 57
million Renminbi (or RMB), or approximately $7.6 million. In connection
with this acquisition, on November 6, 2007, Heilongjiang Weikang was approved by the
Heilongjiang Provincial Government as a foreign invested enterprise
(or FIE), and the acquisition of
Heilongjiang
Weikang was deemed completed on November 9,
2007, the date when the Heilongjiang Office of the State Administration for
Industry and Commerce (or Heilongjiang SAIC) issued a FIE business
license to Heilongjiang Weikang, and registered
Sinary as the 100% owner of Heilongjiang Weikang’s registered capital.
Pursuant to the terms of the equity interests transfer agreement and the
requirements of applicable PRC laws and regulations, Sinary had grace period to
remit the acquisition price by June 30, 2010. Other than the 100%
equity interest
in Heilongjiang
Weikang, Sinary has no other assets. Sinary conducts all of its business
operations through Heilongjiang Weikang.
18
Overview
of Heilongjiang Weikang
Heilongjiang
Weikang was incorporated in the Heilongjiang Province, PRC on March 29, 2005,
formerly known as Heilongjiang Province Weikang Bio-Engineering Co., Ltd.
Heilongjiang Weikang had an initial registered capital
of RMB five million. On November 21, 2006, Heilongjiang Weikang changed its corporate name
to “Heilongjiang
Weikang
Bio-Technology Group Co., Ltd.” and increased its registered
capital to RMB forty million. On October 25, 2007, the owners of
Heilongjiang Weikang sold and transferred
100% of Heilongjiang Weikang’s equity interests to Sinary
pursuant to an equity interests transfer agreement.
Upon completion of the transaction on November 9, 2007, Sinary became the 100%
owner of Heilongjiang Weikang’s registered capital; and
Heilongjiang Weikang was subsequently
approved as a FIE by the Heilongjiang Provincial Government. Heilongjiang
Weikang is primarily engaged in the development, manufacture, marketing and
distribution of health and nutritional supplements in China.
On June
30, 2008, Heilongjiang Weikang entered into a stock transfer agreement with
Tianfang (Guizhou) Pharmaceutical Co., Ltd. (or Tianfang), a limited liability
company organized and existing under the laws of China, and Tianfang’s two
shareholders: Beijing Shiji Qisheng Trading Co., Ltd., a limited liability
company organized and existing under the laws of China, and Tri-H Trade (U.S.A.)
Co., Ltd., a California corporation. Pursuant to the terms of the
Agreement, Heilongjiang Weikang acquired 100% of the issued and outstanding
equity interests of Tianfang in exchange for the aggregate purchase price of
$15,000,000. The transaction was completed on July 22, 2008. Heilongjiang
Weikang has paid $11,192,970 of the $15,000,000 as of the end of 2008. The
remaining balance of the acquisition purchase price was paid off in the first
quarter of 2009. We believe the acquisition with Tiangfang will
strengthen our distribution channels and enrich our production line. As a result
of the acquisition we now not only sell Chinese herbal extract products, but we
also sell “western” pharmaceuticals.
Overview
of Tianfang
Tianfang
was incorporated in the Guizhou Province, China in 1998 with registered capital
of RMB 5,900,000. Tianfang is located within the Zhazuo Medicine Industry Area
of Xiuwen country, Guiyang City, Guizhou Province, China where it engages in the
development, manufacture and distribution of Chinese herbal extract products and
GMP certified western prescription pharmaceuticals. Tianfang’s
operations comprise 71,907 square meters with 14,675 square meters of factory
facilities. The business of Tianfang is well developed and benefits from
economies of scale and cost. Tiangfang has six production lines and all of their
products have received Good Manufacturing Practices (or GMP) certification. In
2008, Tiangfang had sales revenues of $5.43 million and net income of $2.3
million.
Business
Description of the Company
Since the
reverse merger with Sinary and Heilongjiang Weikang was consummated, the Company
has continued operations of Heilongjiang Weikang, which is principally engaged
in developing, manufacturing and distributing health and nutritional supplements
in China, in compliance with Chinese requisite licenses
and approvals. The Company has also expanded its business scope to
develop, manufacture and distribute Chinese herbal extract products and
GMP certified western prescriptive medicine through the acquisition of Tianfang
by Heilongjiang Weikang.
Principal Products or
Services
Heilongjiang
Weikang is located in Heilongjiang Province in Northeastern China, with a
principal office and manufacturing facility located in the Economic and
Technology Development Zone in the city of Shuangcheng, approximately 42
kilometers south of the provincial capital Harbin. All of products are Chinese
herbal-based health and nutritional supplements. Heilongjiang Weikang actively
seeks to maintain and improve the quality of its products, and since April 2006,
Heilongjiang Weikang has implemented the “GB/T19001-2000 idt ISO9001:2000”
quality assurance management system to all of its manufacturing
processes.
Heilongjiang
Weikang currently manufactures and distributes a series of internally developed
health supplements under a Chinese trade name which English transliteration is
“Rongrun”. The “Rongrun”-line of products presently include:
Rongrun
Youth Keeping Capsules
Rongrun
Youth Keeping Capsules contain kudzu vine root, soybean isoflavone, oil extract
from Chinese forest frog, jequirity fruit, and Vitamin E. These capsules may
promote the restoration of the natural balance of female hormones reduce
symptoms of irritability, depression, headache, vomiting, high blood pressure,
and other conditions related to menopause. Balancing female hormones may lower
the risk of arteriosclerosis by utilizing the body’s natural protection against
heart diseases before menopause. These capsules are also intended to increase
the absorption of calcium, which may deter the onset of osteoporosis, and to
enhance the body’s immune system in order to counter negative health conditions
associated with aging beyond menopause. This product accounted for approximately
5.9% of our total sales in 2008.
19
Rongrun
Energy Keeping Capsules
The key
component of the Rongrun Energy Keeping Capsules is grape seed extract, which is
harvested for its high content of oligomeric proacnthocyanidins (or OPC). OPC is
being studied for its antioxidant properties in reducing free radicals and
oxidative stress, which may be effective in reducing the risk of cardiovascular
disease by promoting blood vessel elasticity and countering inflammation, and
promote a slower and healthier aging process by increasing skin elasticity and
smoothness, joint flexibility and heightening immunity. Other ingredients of the
Energy Keeping Capsules include Barbary wolfberry fruit, which may improve
eyesight and promote liver function by reducing lipid accumulation in the liver,
Vitamin E and oil extracted from corn endosperm, which is the albumin tissue
produced in the seeds during fertilization and is rich in nutrients. This
product accounted for approximately 9.8% of our total sales in
2008.
Rongrun
Vitamin Sugar Capsules
The
Rongrun Vitamin Sugar Capsules contain bitter melon, hawthorne fruit, propolis,
cactus, Vitamin E, and oil extract from corn endosperm, and aims to reduce the
onset of cardiovascular disease and fatigue, and promote healthy aging.
Propolis, which is a resinous substance that bees collect from tree buds or
other botanical sources and used as a sealant in the hive, has long been used in
Chinese traditional medicine for the relief of inflammations, viral diseases,
ulcers, and superficial burns or scalding. This product accounted for
approximately 9.47% of our total sales in 2008.
Rongrun
Intestine Cleansing Capsules
The
Rongrun Intestine Cleansing Capsules contain shisonin, black currant, Vitamin E,
and oil extract from corn endosperm. Shisonin (perilla frutescens), or wild
red basil, has long been harvested in China for its medicinal properties. These
capsules are intended to lower blood lipid levels in order to reduce the
likelihood of brain and heart vessel related diseases, to provide nutrition for
the brain and the optic nerve, to strengthen the immune system, and to promote
a healthy aging process. This product accounted for approximately 9.27% of
our total sales in 2008.
Rongrun
Artery Cleansing Capsules
The
constituent ingredients of the Rongrun Artery Cleansing Capsules are gingko,
hawthorn fruit, Vitamin E, and oil extract from corn endosperm. Ginkgo extract
may have three effects on the human body: it may improve blood flow
(including microcirculation in small capillaries) to most tissues and organs; it
may protect against oxidative cell damage from free radicals; and it
may block many of the effects of platelet-activating factor (platelet
aggregation, blood clotting) that have been related to the development of a
number of cardiovascular, renal, respiratory and central nervous system
diseases are intended to reduce the level of cholesterol built-up in the
arteries in order promote healthier heart and brain functions and to decrease
the likelihood of heart attacks and strokes. This product accounted for
approximately 9.52% of our total sales in 2008.
Rongrun
Royal Jelly Extract
Royal
Jelly is a honey bee secretion that is used in the nutrition of the bee larvae,
and has been used as part of traditional Chinese medicine since the early first
century. Royal Jelly is a rich source of complete protein, containing all the
essential amino acids, as well as essential fatty acids, minerals and vitamins,
particularly pantothenic acid (B-5) and pyridoxine (B-6). Royal Jelly also
contains collagen; lecithin; and vitamins A, C, D and E. Additionally, Royal
Jelly contains several other compounds that have been shown to help lower
cholesterol. Another component in Royal Jelly, 10-Hydroxy-2-Decenoic Acid
(10-HDA), is being studied for its immuno-regulatory and anti-cancer properties.
While Royal Jelly is widely available commercially, Weikang’s Rongrun Royal
Jelly Extract is distinguished from the competition by its enhanced
concentration of 10-HDA. Weikang introduced its Royal Jelly product in 2007.
This product accounted for approximately 9.55% of our total sales in
2008.
Rongrun
Kidney Boost Tonic
Rongrun
Kidney Boost Tonic contains various traditional Chinese herbs including ginseng,
dioscorea and cistanche salsa. All of the components in our tonic have been used
for centuries in China to strengthen and promote healthy kidney functions. A
tenet of traditional Chinese medicine is that a strong kidney attributes to
strong “qi”, which
translates into strong bones, sharp vision, clarity of hearing, and healthy
organs, while unhealthy kidneys are responsible for weak “qi” as manifested by physical
weakness, low energy level, mental deficiency, high blood pressure and reduced
sex drive. This product accounted for approximately 3.3% of our total sales in
2008.
Ferrous
Fumarate Granule
Ferrous
Fumarate Granule contains Ferrous Fumarate. It is used for iron deficiency
anemia caused by various reasons, such as, chronic blood loss, malnutrition,
pregnancy, or child development period. This product accounted for
approximately 11.34% of our total sales in 2008.
20
Eucommia
Ulmoides Oliv Granule
The key
components of Eucommia Ulmoides Oliv Granule are Eucommiae ulmoides Oliv,
Eucommiae ulmoides Oliv leaves, which is nourishing liver and kidney,
strengthening muscles and bones. This product accounted for approximately 15.35%
of our total sales in 2008.
Bushen
Qiangshen Tablet
Bushen
Qiangshen Tablet contains Epimedium, dodder, Rosa laevigata, glossy privet fruit
and cibot rhizome, which may be effective in nourishing the liver and kidney,
enriching yin, strengthening yang, and enhancing health and brain function. This
product accounted for approximately 6.77% of our total sales in
2008.
Tinidazole
Vaginal Effervescent Tablet
The key
component of Tinidazole Vaginal Effervescent Tablet is Tinidazole. It
is intended to fight infections caused by anaerobe, especially for anaerobic
infection of female reproductive systems. This product accounted for
approximately 9.79% of our total sales in 2008.
Product
Development
Our
current products under development as of December 31, 2008 include:
10-hydroxy-2-decylenic acid, commonly known as 10-HDA, in gel capsule and in
powder formats. 10-HDA has been promoted as having anti-cancer properties and
used in the treatment of radiation damages and angiocardiopathy. Our products
have been approved by the Heilongjiang Department of Health, although we have
not yet begun production we expect production to begin in 2011 or
2012.
In cooperation with Forest Ecology Department of Northeast Forestry University
in 2008 we have been developing new product lines involving the planting
of‘ShuangBaoGu’ (a variety of mushroom) on Saline-alkali
Soil. Through a process involving the fruit
of ‘ShuangBaoGu’, sweet corn, and beet we obtain sweet corn bamboo
juice, sweet corn straw juice, and beet juice. These juices are
considered by some to be good for people who suffer from cardiovascular
disease. Through the development of these products we hope to help
customers reduce the level of cholesterol built-up in arteries promote healthier
heart and brain functions. This project has not yet begun production, but should
be carried out sometime in 2011 or 2012.
As a
result of the acquisition of Tianfang, we are developing a new product known as
DOFETILIDE. DOFETILIDE is a medicine that is given to patients with
atrial fibrillation (irregular heartbeats). Atrial fibrillation happens when
certain parts of the heart (the chambers known as atria) beat too fast or
irregularly. You may get an uncomfortable feeling in your chest and 'fluttering'
or 'palpitations.' Dofetilide may help your heart to beat more regularly and
stay beating regularly for a longer period of time. This medicine has not yet
begun production. We expect production to begin in 2011 or
2012.
Our
Distribution Methods
Since
Weikang first launched its products from its home base of Heilongjiang Province
in May 2006, we have extended our sales and distribution network to the national
capital of Beijing as well as to four provinces, namely: Anhui, Hebei, Henan and
Jiangsu. Currently, we only sell to wholesale dealers, who then distribute our
products to their customers such as local retail stores and pharmacies. Weikang
will continue to identify and establish business relationships with more
wholesale vendors across China in order to strengthen our distribution
network.
The
acquisition of Tianfang has helped to expand our distribution network and
increase our sales channel since Tianfang has more than 60 large-scale sale
agents throughout China.
We
recognize the importance of branding as well as packaging. All of Weikang’s
products bear a uniform brand but have specialized designs to differentiate
the different categories of Weikang's products. Additionally, Weikang conducts
promotional marketing activities to publicize and enhance its image as well as
to reinforce the recognition of its brand name, which includes: (1) organizing
cooperative promotional activities with distributors; (2) conducting product
informational meetings with distributors; and (3) creating sales incentive
programs such as rebates for distributors.
21
Dependence
on Major Customers
For the
year ended December 31, 2008, approximately 97.03% of the Company's total net
revenues were generated by five customers, Weikang Pharmaceutical Group Co.,
Ltd. (14.48%), Mr. Zhiming Xun who is our Anhui distributor (23.92%), Ms. Min Wu
who is our Jiangsu distributor (21.69%), Mr. Lei Shi who is our Henan
distributor (19.29%) and Ms. Yumei Chen who is our Hebei distributor (17.65%).
The loss of any and/or all of these customers could have a material adverse
effect on our business
Our
largest customer, Weikang Pharmaceutical Group Co., Ltd., is owned by Mr. Yin
Wang, our current chief executive officer and chairman of the board of
directors. Mr. Wang was also a shareholder of Heilongjiang Weikang
Bio-Technology Group Co., Ltd., our Chinese operating company, before the
company was acquired by Sinary.
Competition
Although
we presently do not have any direct competitors in the PRC due to the uniqueness
of most of our products, competitive products are available on the marketplace
that offer features similar to those of our products. For example, Jinwanxia
Technology Development Co., Ltd., a subsidiary of the state-owned pharmaceutical
conglomerate Heilongjiang Pharmaceutical Group Holding Co., Ltd., distributes a
line of bee-derived products which potentially competes with Weikang’s Royal
Jelly Extract. China’s health supplements industry is highly fragmented and
competitive, and companies such as Jinwanxia have greater financial, marketing
and technical resources than us. Additionally, there can be no assurance that
one or more of these companies will not develop products that compete directly
with, and are equal or superior to, our products. Nevertheless, we believe that
we can maintain and increase our market position through our strong R&D
capability, unique products, growing sales network and competitive
prices.
Sources
and Availability of Raw Materials and Our Principle Suppliers
Our
principal raw materials are the various vitamins, minerals, and herbal compounds
and extracts used in our products, many of which are staples in traditional
Chinese pharmacology. Our principal suppliers include Hebei Baoen Bio-Technology
Co., Ltd. (for extracts of grape seed, Barbary wolfberry and hawthorn berry),
Xuchang Yuanhua Bio-Technology Co., Ltd. (for shisonin extracts) and
Shijiazhuang South Wind Rihua Co., Ltd. (for plant oil extracts). The
prices for these raw materials are subject to market forces largely beyond our
control, including energy costs, market demand, and freight costs. We have no
long term agreements with our suppliers, and purchase raw materials on a
purchase order basis. Our management recognizes that this strategy also carries
with it the potential disadvantages and risks of shortages and supply
interruptions. Our suppliers are meeting our supply requirements, and we believe
our relationships with our suppliers are stable.
Intellectual
Property
We rely
on a combination of trademark, copyright and trade secret protection laws in PRC
and other jurisdictions, as well as confidentiality procedures and contractual
provisions to protect our intellectual property and brand. As a part of their
employment with Weikang, each employee agrees to abide by the confidentiality
provisions set forth in Weikang’s employee procedure guide. We currently have a
trademark application pending before the PRC Trademark Office for the Chinese
characters which English transliteration is “Rongrun”. We have also submitted
trademark applications for the Chinese characters which English transliterations
are “Weikang” and “Shenqi”. The examination process is expected to take up to
three years to complete.
Health
and nutritional supplements manufacturers may at times be involved in litigation
based on allegations of infringement or other violations of intellectual
property rights. Furthermore, the application of laws governing intellectual
property rights in the PRC is uncertain and evolving and could involve
substantial risks to us.
Government
Approval and Regulation of Our Principal Products
General
PRC Government Approval
Weikang
currently has the requisite approval and licenses from the Heilongjiang
Provincial Government and the Heilongjiang Office of the State Administration
for Industry and Commerce to manufacture, process and distribute health
supplements in pill and tonic forms.
Compliance
with Circular 106 and the 2006 M&A Regulations
On May
31, 2007, China’s State Administration of Foreign Exchange (or SAFE) issued an
official notice known as “Circular 106”, which requires the owners of Chinese
companies to obtain SAFE’s approval before establishing any offshore holding
company structure in so-called “round-trip” investment transactions for foreign
financing as well as subsequent acquisition matters in China. Likewise, the
“Provisions on Acquisition of Domestic Enterprises by Foreign Investors” (know
as the 2006 M&A Regulations), issued jointly by Ministry of Commerce (or
MOFCOM), State-owned Assets Supervision and Administration Commission, State
Taxation Bureau, State Administration for Industry and Commerce, China
Securities Regulatory Commission and SAFE in September 2006, impose approval
requirements from MOFCOM for “round-trip” investment transactions, including
acquisitions in which equity is used as consideration.
22
Because
Sinary was not established by the owners of Weikang and because Sinary and
Weikang are owned by unrelated parties, the two companies did not have any
direct or indirect connection until Sinary’s acquisition of Weikang. Sinary
acquired Weikang for cash, rather than equity, consideration. Sinary’s sole
stockholder (immediately prior to the share exchange transaction with Expedition
Leasing) is not a “domestic person” as defined under Circular 106. Accordingly,
Sinary is not a “special purpose company” as defined in Circular 106 and
Sinary’s acquisition of Weikang is not a “round trip” investment transaction. As
such, Circular 106 and the provisions of the 2006 M&A Regulations relating
to special purpose companies are not implicated. Sinary’s acquisition of Weikang
is a pure cross-border merger and acquisition transaction governed by and
permitted under the 2006 M&A Regulations, and Weikang was accordingly
approved and issued a business license as a FIE by the Heilongjiang Provincial
Government and the Heilongjiang Office of the State Administration for Industry
and Commerce, respectively.
Costs
and Effects of Compliance with Environmental Laws
We are
subject to certain requirements and potential liabilities under national,
regional and municipal environmental laws, ordinances and regulations in the
PRC. We may generate certain wastes that may be deemed hazardous or toxic under
applicable environmental laws, and we from time to time have incurred, and in
the future may incur, costs relating to compliance with the environmental laws.
Although we may incur remediation and other environmental-related costs
during the ordinary course of operations, management anticipates that such costs
will not have a material adverse effect on our operations or financial
condition.
Research
and Development
We are
committed to quality research and development (or R&D). We focus on the
development of new products and the improvement of existing products. Our
R&D team is led by Dr. Zhengbin Xu, M.D., who has over 40 years of clinical
and research experience in traditional Chinese herbs and in nutrition, and who
has published 56 scientific articles in international and domestic journals. Dr.
Xu’s prior professional affiliations include the Chinese Medicine Research
Bureau (as Vice Director of Research and Development), Heilongjiang Province
Chinese Medicine Co., Ltd. (as General Manager), and the Chinese Medical
Association (as Vice President).
Other
members of our R&D team include: (i) Mr. Hongbin Cui, who is an Executive of
Harbin Medical School’s Public Health Institute with over 20 years of research
experience in dermatology and nutrition; (ii) Mr. Zuo Zhang, Vice President and
Chief Pharmacist of Harbin Medical School Hospital, and an executive of
Heilongjiang Province Medical Association; (iii) Mr. Hua Shi, Vice Administrator
of Heilongjiang Province Health Quality Control Bureau and a health supplements
expert; (iv) Mr. Bingchun Wu,
who is a former Executive of Heilongjiang Province Chinese Medicine
Research Association; and (v) Mr. Huisheng Qin, M.D., Ph.D., who has over 20 years
experience as a surgeon, professor and scientist and knowledge in neurobiology,
molecular cell biology, pathology, pharmacology and nutritional
science.
For
fiscal year 2008, we had approximately $9,560 in R&D expenses.
Our
Employees
In 2009,
the Company had 282 employees of which 227 were considered full-time
employees. Out of our 282 employees approximately 68 are involved in
our administration, 159 are involved in production and 55 are part-time sales
representatives. We have not experienced any significant work
stoppage or production shutdown since inception and we do not anticipate any in
the near future. Our management believes that we have a strong
relationship with our workers.
Our
Principal Executive Offices
Our
principal executive office is located in the Economic & Technology
Development Zone, Chengxu Village, Shuangcheng Town, Shuangcheng City,
Heilongjiang Province, People's Republic of China. Our telephone number is (86)
0451-88355530.
Reports
to Security Holders
We file
reports including our annual report, information statements as well as other
reports required of publicly held companies with the Securities and Exchange
Commission (or SEC). You can read and copy any materials we file with the
Commission at its' Public Reference Room at 100 F Street, N.E, Washington, DC
20549. You can obtain additional information about the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site (www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the Commission, including us.
23
PROPERTIES
Heilongjiang
Weikang’s principal executive offices and manufacturing facility are located
approximately 42 kilometers south of the provincial capital Harbin, in the
Economic and Technology Development Zone in the City of Shuangcheng. The land
underlying the facility is approximately 9.63 acres in size, and we
acquired the land use rights for this property in 2005. The facility includes
two work shops, an administrative office building, a warehouse and cafeteria
building, all of which are owned by us. We acquired the land use rights and the
buildings of the facility from the Shuangcheng Municipal Government pursuant to
an agreement in 2005, under which we agreed to renovate and utilize the site and
existing buildings and structures for our health supplements business. In
return, we were exempted from certain municipal fees during our renovation
efforts, and we are also exempted from income tax from 2005 to
2008.
Tianfang
is located within the Zhazuo Medicine Industry Area of Xiuwen country, Guiyang
City, Guizhou Province, China where it engages in the development, manufacture
and distribution of Chinese herbal extract products and GMP certified western
prescription pharmaceuticals. Tianfang’s operations comprise 71,907
square meters with 14,675 square meters of factory
facilities. Tiangfang has 4 workshops, 1 administration building, 4
warehouses, and one staff building, all of which are owned by Tiangfang
including the land use rights.
LEGAL
PROCEEDINGS
None
DIRECTORS
AND EXECUTIVE OFFICERS
Current
Executive Officers and Directors
The
following tables set forth information regarding the Company’s current executive
officers and directors of the Company. The Board of Directors is comprised of
only one class. Except as otherwise described below, all of the directors will
serve until the next annual meeting of stockholders or until their successors
are elected and qualified, or until their earlier death, retirement, resignation
or removal. Also provided herein are brief descriptions of the business
experience of each director and executive officer during the past five years and
an indication of directorships held by each director in other companies subject
to the reporting requirements under the federal securities laws.
Name
|
Age
|
Positions
|
||||
Yin
Wang
|
55
|
Chief
Executive Officer and Chairman of the Board of Directors
|
||||
Yanhua
Liu
|
56
|
Chief
Financial Officer, Secretary and Director
|
||||
Wei
Wang
|
57
|
Director
|
||||
Guangxin
Wang
|
30
|
Director
|
||||
Yuanyuan
Jing
|
32
|
Director
|
||||
Weili
Wang
|
60
|
Director
|
Yin Wang
is the founder and Chairman of Weikang. Mr. Yin Wang has extensive clinical
training and bio-medical research experience, having been a physician in China
for over 30 years. From 1980 to 1982, Mr. Yin Wang served as the Director of the
Surgical Department at the Harbin Geriatric Hospital. Thereafter, from 1982
until 2001, Mr. Yin Wang served as the Director of Harbin No. 2 Chinese Medical
Hospital. Shortly thereafter, in 2002, he founded Weikang. Mr. Yin Wang is a
graduate of Harbin Medical University, a prestigious and nationally recognized
medical school in China.
Yanhua Liu
has been Weikang’s Chief Accountant and Chief Financial Officer since 2005. Ms.
Liu is well-versed in financial and accounting matters, having been a certified
public accountant in China for over 20 years. Prior to joining Weikang, Ms. Liu
was the Chief Financial Officer of Harbin Hexin Group Co., Ltd. from 2002 to
2005. Ms. Liu is a graduate of Heilongjiang Agricultural and Mechanical College
with bachelor’s degree in finance.
Wei Wang
has extensive business management experience, having been the Deputy General
Manager in charge of Management and Distribution at Heilongjiang Weikang
Pharmaceutical Co., Ltd. since its founding in 2002. Before then, Ms. Wang was
the Sales Director at Harbin No. 8 Department Store. Ms. Wei is a graduate of
Heilongjiang No. 2 Professional Technical School.
Guangxin
Wang is presently a researcher with Heilongjiang University Software
Institute, a position he has held since 2004. Mr. Guangxin Wang has a master’s
degree in software engineering from Heilongjiang University, and has also
pursued scholarship-based advanced studies in Japan.
24
Yuangyuan
Jing has been the Administrative Director of Weikang since she joined the
company in 2005. Ms. Jing has extensive administrative experience, having been
the Chief Administrator of Huawai Technologies Co., Ltd., a global leading
provider of next generation telecommunications networks, from 2002 to 2005. Ms.
Jing has a master’s degree in international business from the University of
International Business and Economics in Beijing.
Weili Wang
has been a business entrepreneur for many years, both as the founder of
Guandali Technology Group in China in 1992 and as a private consultant advising
Chinese companies on foreign trading. After she immigrated permanently to the
United States in 1999, Ms. Wang continued as a private entrepreneur conducting
trades between the United States and China. Ms. Wang is a 1989 graduate of
Beijing Foreign Language University with a bachelor’s degree in
business.
Audit,
Nominating and Compensation Committees
Due to
our lack of operations and size, we have not designated an audit committee.
Furthermore, we are currently quoted on the OTC Bulletin Board, which is
sponsored by the NASD, under the symbol “WKBT.OB” and the OTCBB does not have
any listing requirements mandating the establishment of any particular
committees. Our board of directors acts as our audit committee and performs
equivalent functions, such as: recommending a firm of independent certified
public accountants to audit the annual financial statements; reviewing the
independent auditors’ independence, the financial statements and their audit
report; and reviewing management's administration of the system of internal
accounting controls. For these same reasons, we did not have any other
committees during fiscal 2009.
Our board
believes that, considering our size and the members of our board, decisions
relating to director nominations can be made on a case-by-case basis by all
members of the board without the formality of a nominating committee or a
nominating committee charter. To date, we have not engaged third parties to
identify or evaluate or assist in identifying potential nominees, although we
reserve the right in the future to retain a third party search firm, if
necessary.
The board
does not have an express policy with regard to the consideration of any director
candidates recommended by shareholders since the board believes that it can
adequately evaluate any such nominees on a case-by-case basis. The board will
evaluate shareholder-recommended candidates under the same criteria as
internally generated candidates. Although the board does not currently have any
formal minimum criteria for nominees, substantial relevant business and industry
experience would generally be considered important, as would the ability to
attend and prepare for board, committee and shareholder meetings. Any candidate
must state in advance his or her willingness and interest in serving on the
board of directors.
We
have not received any recommendations for a director nominee from any
shareholder.
Family
Relationships
There are
no family relationships between or among any of the current directors, executive
officers or persons nominated or charged by the Company to become directors or
executive officers.
Involvement
in Certain Legal Proceedings
There are
no orders, judgments, or decrees of any governmental agency or administrator, or
of any court of competent jurisdiction, revoking or suspending for cause any
license, permit or other authority to engage in the securities business or in
the sale of a particular security or temporarily or permanently restraining any
of our officers or directors from engaging in or continuing any conduct,
practice or employment in connection with the purchase or sale of securities, or
convicting such person of any felony or misdemeanor involving a security, or any
aspect of the securities business or of theft or of any felony. Nor are any of
the officers or directors of any corporation or entity affiliated with us so
enjoined.
Code
of Ethics
We have
adopted a Code of Ethics that applies to our principal chief executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions. The Code of Ethics is being designed with
the intent to deter wrongdoing, and to promote the following:
•
|
Honest and ethical conduct,
including the ethical handling of actual or apparent conflicts of interest
between personal and professional
relationships
|
•
|
Full, fair, accurate, timely and
understandable disclosure in reports and documents that we file with, or
submits to, the SEC and in other public communications made by
us
|
25
• Compliance
with applicable governmental laws, rules and regulations. The prompt internal
reporting of violations of the code to an appropriate person or persons
identified in the code; and
• Accountability
for adherence to the code
Section
16(a) Beneficial Ownership Reporting Compliance
Under
Section 16(a) of the Exchange Act, all executive officers, directors, and each
person who is the beneficial owner of more than 10% of the common stock of a
company that files reports pursuant to Section 12 of the Exchange Act, are
required to report the ownership of such common stock, options, and stock
appreciation rights (other than certain cash-only rights) and any changes in
that ownership with the SEC. Specific due dates for these reports have been
established, and we are required to report, in our annual report on Form 10-K,
any failure to comply therewith during the fiscal year then ended. We believe
that all of these filing requirements were satisfied by our executive officers,
directors and by the beneficial owners of more than 10% of our common stock. In
making this statement, we have relied solely on copies of any reporting forms
received by us, and upon any written representations received from reporting
persons that no Form 5 (Annual Statement of Changes in Beneficial Ownership) was
required to be filed under applicable rules of the SEC.
26
DIRECTOR
AND EXECUTIVE COMPENSATION
The
following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to (i) all individuals serving as the
Company’s principal executive officer or acting in a similar capacity during the
last two completed fiscal years, regardless of compensation level, and (ii) the
Company’s two most highly compensated executive officers other than the
principal executive officers serving at the end of the last two completed fiscal
years.
Summary
Compensation Table
The
following table sets forth certain information regarding the annual and
long-term compensation for services in all capacities to us for the prior fiscal
years ended December 31, 2009, 2008 and 2007, of those persons who were
either the chief executive officer during the last completed fiscal year or any
other compensated executive officers as of the end of the last completed fiscal
year, and whose compensation exceeded $100,000 for those fiscal
periods.
SUMMARY COMPENSATION
TABLE
|
|||||||||
Name
and
principal
position
(a)
|
Year
(b)
|
Salary
($)
(c)
|
Bonus
($)
(d)
|
Stock
Awards
($)
(e)
|
Option
Awards
($)
(f)
|
Non-Equity
Incentive
Plan
Compensation
($)
(g)
|
Nonqualified
Deferred
Compensation
Earnings
($)
(h)
|
All
Other
Compensation
($)
(i)
|
Total
($)
(j)
|
Yin
WangChief Executive Officer and Chairman
|
2009
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
4,000
|
2008
|
4,000
|
0
|
0
|
0
|
0
|
0
|
0
|
4,000
|
|
2007
|
4,000
|
0
|
0
|
0
|
0
|
0
|
0
|
4,000
|
|
Yanhua
LiuChief Financial Officer and Director
|
2009
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
3,000
|
2008
|
3,000
|
0
|
0
|
0
|
0
|
0
|
0
|
3,000
|
|
2007
|
3,000
|
0
|
0
|
0
|
0
|
0
|
0
|
3,000
|
|
Wei
Wang Director
|
2009
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
2008
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
2007
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
Guangxin
WangDirector
|
2009
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
2008
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
2007
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
Yuanyuan
JingDirector
|
2009
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
2008
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
2007
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
Weili
Wang Director
|
2009
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
2008
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
2007
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
27
Outstanding
Equity Awards at Fiscal Year-End
There are
no unexercised options, unvested stock awards or equity incentive plan awards
for any of the above-named executive officers outstanding as of December 31,
2009
Compensation
of Directors
We did
not pay any compensation to our directors for any services provided as a
director during the year ended December 31, 2009. There are no other formal or
informal understandings or arrangements relating to compensation.
Employment
Agreements, Termination of Employment, and Change-in-Control
Arrangements
We
currently have no employment agreements with any of our executive officers, nor
any compensatory plans or arrangements resulting from the resignation,
retirement or any other termination of any of our executive officers, from a
change-in-control, or from a change in any executive officer’s responsibilities
following a change-in-control.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
During
the last two fiscal years, we have not entered into any material transactions or
series of transactions that would be considered material in which any officer,
director or beneficial owner of 5% or more of any class of our capital stock, or
any immediate family member of any of the preceding persons, had a direct or
indirect material interest. There are no transactions presently proposed, except
as follows:
1. Due
from Weikang’s Management and Other Income – Lease income
At
December 31, 2008, due from management represented lease payments received by
Weikang’s CEO on behalf of Weikang for leasing out to a third party the workshop
of manufacturing royal jelly and the right to use its technology for
manufacturing royal jelly for the period from January 1, 2008 through June 30,
2010. During 2008, Weikang’s CEO received lease income of $1,007,919
(RMB 7,000,000) and prepaid lease payment of $219,472 (RMB 1,500,000) on behalf
of the Company.
28
Other
income consisted of income for leasing out to a third party the workshop of
manufacturing royal jelly and the right to use the technology for manufacturing
royal jelly for the period from January 1, 2008 to June 30,
2010. Total lease payment will be received from leasing out the
workshop for the lease term is 7,500,000 RMB, and 10,000,000 RMB from leasing
out the use right of the technology. During 2008, Weikang’s CEO
received lease income on behalf of the Company for $1,007,919 (RMB
7,000,000, of which, 3,000,000 RMB was from leasing out the workshop and
4,000,000 RMB was from leasing out the use right).
At
December 31, 2007, due from management represents payments received by Weikang’s
management on behalf of Weikang from Weikang’s dealers net of payments made for
purchases made by the management on behalf of Weikang. The transactions
were recorded in the officer’s personal bank account. During the four
months ended December 31, 2007 since the acquisition of Heilongjiang Weikang by
Sinary, $687 sales receipts were deposited into the officer’s personal bank
cards, and $608,503 purchase payments were made from the same bank
cards.
2. Due
from Related Party
At
December 31, 2007, due from related party of $135,777 represented accounts
receivable arising from sales made to a related company owned by the Company’s
chief executive officer. Sales to this related party during the four months
ended December 31, 2007 since the acquisition of Heilongjiang Weikang by
Sinary was approximately $92,000.
3. Sales
to Related Party
Our
largest customer, Weikang Pharmaceutical Group Co., Ltd., is owned by Mr. Yin
Wang, our current chief executive officer and chairman of the board of
directors. Mr. Wang was also a shareholder of Heilongjiang Weikang
Bio-Technology Group Co., Ltd., our Chinese operating company, before the
company was acquired by Sinary.
During
2008 and the four months ended December 31, 2007, the Company sold
goods for $1,081,000 and $213,000, respectively, to another related
company owned by the Company’s chief executive officer. The receivables from
this related party was $0 as of December 31, 2008 and 2007.
4. Advance
from Officer and Other Expense
Advance
from officer and other expense represented the payment of $650,000 made by an
officer of Heilongjiang Weikang on behalf of Sinary to certain former
shareholders of the Company in connection with the reverse
acquisition between the Company and Sinary on December 7, 2007. The
advance from officer bears no interest and is payable on demand.
Indemnification
Agreements
None.
Director
Independence
None of
the members of the board of directors is “independent” as defined under the
rules of the NASDAQ Stock Market.
29
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following tables set forth information as of January 31, 2010 regarding the
beneficial ownership of stock by (a) each stockholder who is known by the
Company to own beneficially in excess of 5% of the Company’s outstanding stock;
(b) each director; (c) the Company’s chief executive officer; and (d) the
executive officers and directors as a group. Except as otherwise indicated, all
persons listed below have (i) sole voting power and investment power with
respect to their shares of common stock (the only class of outstanding stock),
except to the extent that authority is shared by spouses under applicable law,
and (ii) record and beneficial ownership with respect to their shares of stock.
The percentage of beneficial ownership is based upon 27,784,388 shares of
common stock outstanding, as of January 31, 2010. Except as otherwise
indicated in the footnotes to the table, the persons and entities named in the
table have sole voting and investment power with respect to all shares
beneficially owned, subject to community property laws, where
applicable.
OFFICERS,
DIRECTORS AND BENEFICIAL OWNERS, AS OF JANUARY 31, 2010
Title
of Class
|
Name
& Address of Beneficial Owner(1)
|
Amount
& Nature of
Beneficial
Owner
|
%
of Class(2)
|
||||
Common
Stock,
|
Weili
Wang
|
24,725,200
|
89%
|
||||
$.00001
par value
|
18138
Via Calma
|
||||||
Rowland
Heights, CA 91758
|
|||||||
Common
Stock,
|
All
directors and executive officers as a group (three
|
24,725,200
|
89%
|
||||
$.00001
par value
|
persons)
|
||||||
Common
Stock,
|
Opus
Holdings Three, LP
|
1,676,470
|
6%
|
||||
$.00001
par value
|
4400
Post Oak Parkway, Ste. 1500
|
(3)
|
|||||
Houston,
TX 77027
|
(1) Unless
stated otherwise, the business address for each person named is c/o Weikang
Bio-Technology Group Co., Inc.
(2) Calculated
pursuant to Rule 13d-3(d) (1) of the Securities Exchange Act of 1934. Under Rule
13d-3(d), shares not outstanding which are subject to options, warrants, rights
or conversion privileges exercisable within 60 days are deemed outstanding for
the purpose of calculating the number and percentage owned by a person, but not
deemed outstanding for the purpose of calculating the percentage owned by each
other person listed. We believe that each individual or entity named has sole
investment and voting power with respect to the shares of common stock indicated
as beneficially owned by them (subject to community property laws where
applicable) and except where otherwise noted.
(3) This
amount includes 500,000 shares which may be purchased pursuant to currently
exercisable warrants.
DESCRIPTION
OF SECURITIES
Description
of Capital Stock
Common
Stock
We are
authorized to issue up to 100,000,000 shares of common stock, $0.0001 par value.
As of December 31, 2009, 25,486,800 shares of our common stock were
outstanding.
Each
outstanding share of common stock entitles the holder thereof to one vote per
share on all matters. Stockholders do not have preemptive rights to purchase
shares in any future issuance of our common stock. Upon our liquidation,
dissolution or winding up, and after payment to our creditors, if any, our
assets will be divided pro-rata on a share-for-share basis among the holders of
the shares of common stock.
The
holders of shares of our common stock are entitled to dividends out of funds
legally available when and as declared by our board of directors. We have never
declared or paid cash dividends. Our board of directors does not anticipate
declaring a dividend in the foreseeable future. Should we decide in the future
to pay dividends, as a holding company, our ability to do so and meet other
obligations depends upon the receipt of dividends or other payments from our
operating subsidiaries and other holdings and investments.
30
Preferred
Stock
We are
authorized to issue up to 5,000,000 shares of preferred stock, $0.01 par value
per share, no shares of which were issued and outstanding as of December 31,
2009.
Our
Certificate of Incorporation authorizes our board to issue shares of preferred
stock in one or more classes or series within a class upon authority of the
board without further stockholder approval. Any preferred stock issued in the
future may rank senior to the common stock with respect to the payment of
dividends or amounts upon liquidation, dissolution or winding up of us, or both.
In addition, any such shares of preferred stock may have class or series voting
rights. Moreover, under certain circumstances, the issuance of preferred stock
or the existence of the un-issued preferred stock might tend to discourage or
render more difficult a merger or other change in control. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging
a third party from acquiring, a majority of our outstanding voting
stock.
Registration
Rights
On
January 20, 2010, the Company entered into a Subscription Agreement with three
“accredited” investors. Pursuant to the Subscription Agreement,
the investors purchased 1,470,588 shares of the Company’s common stock at $1.70
per share. Pursuant to the Subscription Agreement, the Company has agreed to
file a resale Registration Statement on Form S-1 by April 9, 2010 registering
the investor shares of common stock and the shares of common stock issuable
under warrants issued to the investors with the Securities and Exchange
Commission. In the event the Company has not filed the
Registration Statement by the required filing date, or the Registration
Statement is not declared effective by the SEC by 120 days after the required
filing date, the Company has agreed to pay liquidated damages to each investor,
at a rate per month equal to 0.50% of the total purchase price of the shares
purchased by such investor pursuant to the Subscription Agreement. In
no event, however, may the penalties exceed 9% in the aggregate of such total
purchase price.
Resale
of Restricted Securities
Rule 144.
Rule 144 provides an exemption from registration under the Securities Act of
1933 for sales by holders of "restricted securities" (i.e., securities acquired
directly or indirectly from the issuer or an affiliate of the issuer in a
transaction or chain of transactions not involving a public offering) and for
sales of "control securities" (i.e., securities held by affiliates, regardless
of how they acquired them).
In
February 2008, amendments to Rule 144 under the Securities Act of 1933 that
substantially liberalized the rules governing the resale of securities issued in
private transactions or held by affiliates became effective. The amendments
shortened the holding periods for restricted securities of public companies,
significantly reduced the conditions applicable to sales of restricted
securities by non-affiliates, and modified other aspects of the
rules.
Under
amended Rule 144, holders of restricted securities of reporting companies (i.e.,
companies that have been subject to public reporting requirements for at least
90 days before the sale) are able to sell their securities after holding them
for only six months, subject to specified conditions. Sales under Rule 144 may
also limited by manner of sale provisions and notice requirements and to the
availability of current public information about the combined
company.
Sales
by Non-Affiliates under Rule 144
After six
months but prior to one year from the date of acquisition of securities from the
issuer or an affiliate of the issuer, non-affiliates of reporting companies may
resell those securities under Rule 144 subject only to the current public
information requirement described below. They will not have to file a Form 144,
follow manner-of-sale requirements, or stay within the volume limitations. After
holding securities for one year, non-affiliates of both reporting and
non-reporting companies may resell those securities freely without any
additional conditions under Rule 144.
Sales
by Affiliates
In
general, affiliates are subject to all of the requirements under Rule
144.
|
·
|
Current
public information. There must be adequate current public information
available about the issuer. Reporting companies must have been subject to
public reporting requirements for at least 90 days immediately before the
Rule 144 sale and must have filed all required reports (other than Forms
8-K) during the 12 months (or shorter period that the company was subject
to public reporting) before the sale. For non-reporting companies
(including companies that have been subject to the public reporting
requirements for less than 90 days), certain other specified public
information must be available.
|
31
|
·
|
Holding
period. Restricted securities must be held for at least six months before
they may be sold (securities issued in registered transactions are not
subject to a holding period). The holding period for restricted securities
of non-reporting companies is one
year.
|
|
·
|
Volume
limitations. For equity securities, in any three-month period, resales may
not exceed a sales volume limitation equal to the greater of (i) the
average weekly trading volume for the preceding four calendar weeks, or
(ii) one percent of the outstanding securities of the
class. The volume limitations for debt securities permits the
sale of up to 10% of a tranche or class of debt securities in any
three-month period.
|
|
·
|
Manner-of-sale
requirements. Resales of equity securities must be made in unsolicited
"brokers' transactions" or transactions directly with a "market maker" and
must comply with other specified requirements. Equity
securities may be sold in "riskless principal transactions" (in addition
to "brokers' transactions" and transactions directly with a "market
maker").
|
|
·
|
Filing
of Form 144. The seller must file a Form 144 if the amount of securities
being sold in any three-month period exceeds the lesser of 5,000 shares or
$50,000 in aggregate sales price.
|
Nevada
Law
Some
provisions of Nevada law and our Certificate of Incorporation and amended and
restated bylaws could make the following transactions more
difficult:
|
·
|
acquisition
of our company by means of a tender offer, a proxy contest or otherwise;
and
|
|
·
|
removal
of our incumbent officers and
directors.
|
These
provisions of our amended and restated certificate of incorporation and amended
and restated bylaws, summarized below, are expected to discourage and prevent
coercive takeover practices and inadequate takeover bids. These provisions are
designed to encourage persons seeking to acquire control of our company to
negotiate first with our board of directors. They are also intended to provide
our management with the flexibility to enhance the likelihood of continuity and
stability if our board of directors determines that a takeover is not in the
best interests of our stockholders. These provisions, however, could have the
effect of discouraging attempts to acquire us, which could deprive our
stockholders of opportunities to sell their shares of common stock at prices
higher than prevailing market prices.
Under the
NRS, amendments of a company's articles of incorporation generally require the
approval of the holders of a majority of the outstanding stock entitled to vote
on the amendment, and if the amendment would increase or decrease the number of
authorized shares of any class or series or the par value of shares of that
class or series or would adversely affect the rights, powers or preferences of
that class or series, a majority of the outstanding stock of that class or
series also would be required to approve the amendment.
Under the
NRS, a special meeting of shareholders can be called by a company's board of
directors or by any person or persons as may be authorized by the corporation's
articles of incorporation or bylaws. The NRS permit corporate action without a
meeting of shareholders upon the written consent of the holders of that number
of shares necessary to authorize the proposed corporate action being taken,
unless the articles of incorporation or bylaws expressly provide otherwise.
Under the NRS, any director may be removed by the vote of shareholders
representing not less than two-thirds of the voting power entitled to
vote.
The NRS
provides that any merger, consolidation or share exchange of a Nevada
corporation, as well as the sale, lease, exchange or disposal of all or
substantially all of its assets not in the ordinary course of business,
generally must be recommended by the Board and approved by a vote of a majority
of the outstanding shares of stock of the corporation entitled to vote on such
matters, unless the articles of incorporation provides otherwise. Under the NRS,
the vote of the shareholders of a corporation surviving a merger is not required
if: (a) the articles of incorporation of the surviving domestic corporation will
not differ from its articles before the merger; (b) each stockholder of the
surviving domestic corporation whose shares were outstanding immediately before
the effective date of the merger will hold the same number of shares, with
identical designations, preferences, limitations and relative rights immediately
after the merger; (c) the number of voting shares outstanding immediately after
the merger, plus the number of voting shares issued as a result of the merger,
either by the conversion of securities issued pursuant to the merger or the
exercise of rights and warrants issued pursuant to the merger, will not exceed
by more than 20 percent the total number of voting shares of the surviving
domestic corporation outstanding immediately before the merger; and (d) the
number of participating shares outstanding immediately after the merger, plus
the number of participating shares issuable as a result of the merger, either by
the conversion of securities issued pursuant to the merger or the exercise of
rights and warrants issued pursuant to the merger, will not exceed by more than
20 percent the total number of participating shares outstanding immediately
before the merger.
32
The NRS
provides that any person who has been a shareholder of record for at least six
months preceding his demand, or any person holding, or thereunto authorized in
writing by the holders of, at least 5 percent of all of the Company’s
outstanding shares is entitled to inspect the corporation's stock ledger,
articles of incorporation, bylaws and any amendments to the articles of
incorporation and bylaws.
Anti-Takeover
Implications
Nevada,
like many other states, permits a corporation to adopt a number of measures
through amendment of the corporate articles of incorporation or bylaws or
otherwise, which measures are designed to reduce a corporation's vulnerability
to unsolicited takeover attempts. The reincorporation is not being proposed in
order to prevent such a change in control, nor is it in response to any present
attempt known to the board of directors to acquire control of the Company or to
obtain representation on the board of directors.
In the
discharge of its fiduciary obligations to its shareholders, the board of
directors has evaluated the Company's vulnerability to potential unsolicited
bidders. In the course of such evaluation, the board of directors of the Company
may consider in the future certain defensive strategies designed to enhance the
Board's ability to negotiate with an unsolicited bidder. These strategies
include, but are not limited to, the adoption of a shareholder rights plan and
severance agreements for its management and key employees that become effective
upon the occurrence of a change in control of the Company. None of these
measures has been implemented by the Company under Nevada law.
Undesignated
Preferred Stock. The authorization of undesignated preferred stock
makes it possible for our board of directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of our company.
These
provisions could have the effect of discouraging others from attempting hostile
takeovers and, as a consequence, they may also inhibit temporary fluctuations in
the market price of our common stock that often result from actual or rumored
hostile takeover attempts. These provisions may also have the effect of
preventing changes in our management. It is possible that these provisions could
make it more difficult to accomplish transactions that stockholders may
otherwise deem to be in their best interests.
Warrants
At
January 31, 2010, the following warrants were outstanding:
Investor
Warrants
·
|
Warrants
to purchase 312,500 shares of common stock at an initial exercise price of
$3.00 per share. Pursuant to the terms of such warrants, the exercise
price of such warrants is subject to adjustment in the event of stock
splits, combinations or the like of our common
stock.
|
·
|
Warrants
to purchase 312,500 shares of common stock at an initial exercise price of
$5.00 per share. Pursuant to the terms of such warrants, the exercise
price of such warrants is subject to adjustment in the event of stock
splits, combinations or the like of our common
stock.
|
Other
Warrants
·
|
Warrants
to purchase 73,528 shares of common stock at an initial exercise price of
$3.00 per share. Pursuant to the terms of such warrants, the exercise
price of such warrants is subject to adjustment in the event of stock
splits, combinations or the like of our common
stock.
|
·
|
Warrants
to purchase 73,528 shares of common stock at an initial exercise price of
$5.00 per share. Pursuant to the terms of such warrants, the exercise
price of such warrants is subject to adjustment in the event of stock
splits, combinations or the like of our common
stock.
|
Market
Information
Our
common stock price is quoted on the OTC Bulletin Board, or OTCBB, under the
symbol “WKBT.”
33
SELLING
STOCKHOLDERS
The
following table sets forth as of January 31, 2010, information
regarding the current beneficial ownership of our common stock by the persons
identified, based on information provided to us by them, which we have not
independently verified. Although we have assumed for purposes of the table that
the Selling Stockholders will sell all of the shares offered by this prospectus,
because they may from time to time offer all or some of their shares under this
prospectus or in another manner, no assurance can be given as to the actual
number of shares that will be resold by the Selling Stockholder (or any of
them), or that will be held after completion of the resales. In
addition, a Selling Stockholder may have sold or otherwise disposed of shares in
transactions exempt from the registration requirements of the Securities Act or
otherwise since the date he or she provided information to us. The Selling
Stockholders are not making any representation that the shares covered
by this prospectus will be offered for sale. No Selling Stockholder has
held any position nor had any material relationship with us or our affiliates
during the past three years. Each of the Selling Stockholders has
advised the Company that it is not a registered broker-dealer or an affiliate of
a registered broker-dealer.
Shares of Common
Stock
Beneficially Owned
Prior to Offering(1)
|
Shares
Being
Offered
|
Shares of Common Stock
Beneficially Owned After
Offering(2)
|
||||||||||||||||||
Selling Stockholder
|
Shares
|
%
|
Shares
|
%
|
||||||||||||||||
Opus
Holdings Three, LP (3)
|
1,676,470 | 6 | 1,676,470 | 0 | * | |||||||||||||||
Joseph
R. Lee (4)
|
209,559 | * | 209,559 | 0 | * | |||||||||||||||
Lee
Bear, LLC (5)
|
209,559 | * | 209,559 | 0 | * | |||||||||||||||
Total
|
2,095,588 | 7.5 | % | 2,095,588 | 0 | * | % |
* Less
than one percent
.
(1)
|
This
table is based upon information supplied by the selling shareholder. The
number and percentage of shares beneficially owned are based on an
aggregate of 27,784,388 shares of our common stock outstanding as of
January 31, 2010.
|
(2)
|
Because
the selling shareholder identified in this table may sell some, all or
none of the shares owned by it that are registered under this registration
statement, and because, to our knowledge, there are currently no
agreements, arrangements or understandings with respect to the sale of any
of the shares registered hereunder, no estimate can be given as to the
number of shares available for resale hereby that will be held by the
selling shareholders at the time of this registration statement.
Therefore, we have assumed for purposes of this table that the selling
shareholder will sell all of the shares beneficially owned by
it.
|
(3)
|
This
amount includes 500,000 shares which may be purchased pursuant to
currently exercisable
warrants.
|
(4)
|
This
amount includes 62,500 shares which may be purchased pursuant to currently
exercisable warrants.
|
(5)
|
This
amount includes 62,500 shares which may be purchased pursuant to currently
exercisable warrants.
|
On
January 20, 2010, Weikang entered into a Subscription Agreement with the three
“accredited” investors listed above; pursuant to which, the investors purchased
1,470,588 shares of the Company’s common stock at $1.70 per share; warrants to
purchase an aggregate of 312,500 shares at $3.00 per share and warrants to
purchase an aggregate of 312,500 shares at $5.00 per share. The Company raised
$2,500,000 in gross proceeds and received net proceeds from the financing of
approximately $2,052,500, after placement agent fees and other offering
expenses.
PLAN
OF DISTRIBUTION
The
Selling Stockholders and any of their pledgees, donees, transferees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of Common Stock on any stock exchange, market or trading facility on
which the shares are traded or quoted or in private
transactions. These sales may be at fixed or negotiated
prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:
34
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits investors;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
to
cover short sales made after the date that this Registration Statement is
declared effective by the SEC;
|
|
·
|
broker-dealers
may agree with the Selling Stockholders to sell a specified number of such
shares at a stipulated price per
share;
|
|
·
|
a
combination of any such methods of sale;
and
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
The
Selling Stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the Selling Stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or
discounts from the Selling Stockholders (or, if any broker-dealer acts as agent
for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions
and discounts to exceed what is customary in the types of transactions
involved.
The
Selling Stockholders may from time to time pledge or grant a security interest
in some or all of the securities owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell shares of Common Stock from time to time under this prospectus,
or under an amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act of 1933 amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
Upon the
Company being notified in writing by a Selling Stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of Common
Stock through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, under the Securities Act, disclosing (i)
the name of each such Selling Stockholder and of the participating
broker-dealer(s), (ii) the number of shares involved, (iii) the price at which
such the shares of Common Stock were sold, (iv) the commissions paid or
discounts or concessions allowed to such broker-dealer(s), where applicable, (v)
that such broker-dealer(s) did not conduct any investigation to verify the
information set out or incorporated by reference in this prospectus, and (vi)
other facts material to the transaction. In addition, upon the
Company being notified in writing by a Selling Stockholder that a donee or
pledgee intends to sell more than 500 shares of Common Stock, a supplement to
this prospectus will be filed if then required in accordance with applicable
securities law.
The
Selling Stockholders also may transfer the shares of Common Stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this
prospectus.
The
Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Discounts,
concessions, commissions and similar selling expenses, if any, that can be
attributed to the sale of Securities will be paid by the Selling Stockholder
and/or the purchasers. Each Selling Stockholder has represented and
warranted to the Company that it acquired the securities subject to this
Registration Statement in the ordinary course of such Selling Stockholder’s
business and, at the time of its purchase of such securities such Selling
Stockholder had no agreements or understandings, directly or indirectly, with
any person to distribute any such securities.
35
The
Company has advised each Selling Stockholder that it is the view of the SEC that
it may not use shares registered on this Registration Statement to cover short
sales of Common Stock made prior to the date on which this Registration
Statement shall have been declared effective by the SEC. If a Selling
Stockholder uses this prospectus for any sale of the Common Stock, it will be
subject to the prospectus delivery requirements of the Securities
Act. The Selling Stockholders will be responsible to comply with the
applicable provisions of the Securities Act and Exchange Act, and the rules and
regulations thereunder promulgated, including, without limitation, Regulation M,
as applicable to such Selling Stockholders in connection with resales of their
respective shares under this Registration Statement.
The
Company is required to pay all fees and expenses incident to the registration of
the shares, but the Company will not receive any proceeds from the sale of the
Common Stock. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
We agreed
to keep this prospectus effective until the earlier of (i) the date on which the
shares may be resold by the Selling Stockholders without registration and
without regard to any volume limitations by reason of Rule 144(k) under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to this prospectus or Rule 144 under the Securities Act
or any other rule of similar effect. The resale shares will be sold
only through registered or licensed brokers or dealers if required under
applicable state securities laws. In addition, in certain states, the resale
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
DISCLOSURE
OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
The
Company's directors and executive officers are indemnified as provided by the
Nevada General Corporation Law and the Company's Bylaws. These provisions state
that the Company's directors may cause the Company to indemnify a director or
former director against all costs, charges and expenses, including an amount
paid to settle an action or satisfy a judgment, actually and reasonably incurred
by him as a result of him acting as a director. The indemnification of costs can
include an amount paid to settle an action or satisfy a judgment. Such
indemnification is at the discretion of the Company's board of directors and is
subject to the Securities and Exchange Commission's policy regarding
indemnification.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
INDEMNIFICATION
OF OFFICERS AND DIRECTORS
The
rights of our shareholders are governed by Weikang's articles of incorporation
and bylaws and the Nevada Revised Statutes (or NRS). The summary below is not an
exhaustive or a complete description of the matters described, and is qualified
in its entirety by reference to the NRS, the Company’s articles of
incorporation, as amended and restated, and bylaws. The Company's articles of
incorporation, as amended and restated, and its bylaws are available for
inspection and copying upon request by any shareholder.
The NRS
has provisions and limitations regarding directors' liability. The NRS permit a
corporation to include in its articles of incorporation a provision that
eliminates or limits the personal liability of a director to the corporation or
its shareholders for monetary damages for breach of fiduciary duties as a
director. Under the NRS, the limitation of liability is for other than acts or
omissions that involve a breach of fiduciary duty by the director to the Company
and that involve intentional misconduct, fraud, or a knowing violation of
law.
The NRS
generally permits a corporation to indemnify its directors and officers against
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with a third-party action, other than a
derivative action, and against expenses actually and reasonably incurred in the
defense or settlement of a derivative action, provided that there is a
determination that the individual acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the corporation. That
determination must be made, in the case of an individual who is a director or
officer at the time of the determination, by a majority of the disinterested
directors, even though less than a quorum; by independent legal counsel,
regardless of whether a quorum of disinterested directors exists; or by a
majority vote of the shareholders, at a meeting at which a quorum is
present.
36
The NRS
requires indemnification of directors and officers for expenses relating to a
successful defense on the merits or otherwise of a derivative or third-party
action. Under the NRS, indemnification may not be made for any claim, issue or
matter as to which such a person has been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable to the
corporation or for amounts paid in settlement to the corporation, unless and
only to the extent that the court in which the action or suit was brought or
other court of competent jurisdiction determines upon application that in view
of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper.
With
respect to the advancement of expenses incurred by an officer or director in
defending a civil or criminal action, suit or proceeding, under the NRS, the
articles of incorporation, the bylaws or an agreement made by the corporation
may provide that the expenses of officers and directors incurred in defending a
civil or criminal action, suit or proceeding must be paid by the corporation as
they are incurred and in advance of the final disposition of the action, suit or
proceeding, upon receipt of an undertaking by or on behalf of the director or
officer to repay the amount if it is ultimately determined by a court of
competent jurisdiction that he is not entitled to be indemnified by the
corporation.
LEGAL
MATTERS
The
legality of the issuance of the shares offered in this prospectus will be passed
upon for us by The Crone Law Group, San Francisco, California. The Crone Law
Group holds 7,000 shares of common stock of Weikang.
EXPERTS
The
consolidated financial statements of our company as of December 31, 2008 and
2007 included in this prospectus have been audited by Goldman Parks Kurland Mohidin
LLP, Independent registered public accountants, as stated in its report
appearing herein and elsewhere in this prospectus, and have been so included in
reliance upon the report of this firm given upon their authority as experts in
auditing and accounting.
WHERE
YOU CAN FIND MORE INFORMATION
We have
filed with the Securities and Exchange Commission a registration statement on
Form S-1 (including exhibits) under the Securities Act, with respect to the
shares to be sold in this offering. This prospectus does not contain all the
information set forth in the registration statement. For further information
with respect to our company and the common stock offered in this
prospectus, reference is made to the registration statement, including the
exhibits filed thereto. With respect to each such document filed with the SEC as
an exhibit to the registration statement, reference is made to the exhibit for a
more complete description of the matter involved.
We file
quarterly and annual reports, proxy statements and other information with the
SEC. You may read and copy any document that we file at the public reference
facilities of the SEC in Washington, D.C. You may call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. Our SEC filings are also
available to the public from the SEC’s website at
http://www.sec.gov.
37
WEIKANG
BIO-TECHNOLOGY GROUP COMPANY, INC. AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Condensed
Consolidated Financial Statements for the Nine Months Ended September 30,
2009 and 2008
|
|
Condensed
Consolidated Balance Sheets
|
F-2
|
Condensed
Consolidated Statements of Operations and Comprehensive
Income
|
F-3
|
Condensed
Consolidated Statements of Cash Flows
|
F-4
|
Notes
to Condensed Consolidated Financial Statements
|
F-5
|
Consolidated
Financial Statements for the Years Ended December 31, 2008 and
2007
|
|
Report
of Independent Registered Public Accounting Firm
|
F-12
|
Consolidated
Balance Sheets
|
F-13
|
Consolidated
Statements of Operations and Comprehensive Income
|
F-14
|
Consolidated
Statements of Stockholders’ Equity and Comprehensive
Income
|
F-15
|
Consolidated
Statements of Cash Flows
|
F-16
|
Notes
to Consolidated Financial Statements
|
F-17
|
F-1
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
SEPTEMBER
30,
|
DECEMBER
31,
|
||||||
|
2009
|
2008
|
||||||
(UNAUDITED)
|
(AUDITED)
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
& cash equivalents
|
$
|
8,708,443
|
$
|
16,927
|
||||
Accounts
receivable
|
329,477
|
-
|
||||||
Advances
to suppliers and other receivables
|
126,248
|
41,697
|
||||||
Inventory
|
498,491
|
151,942
|
||||||
Due
from management
|
65,417
|
1,243,672
|
||||||
Total
current assets
|
9,728,076
|
1,454,238
|
||||||
NONCURRENT
ASSETS
|
||||||||
Property
and equipment, net
|
10,404,658
|
11,098,046
|
||||||
Intangible
assets
|
12,072,638
|
12,214,405
|
||||||
Total
noncurrent assets
|
22,477,296
|
23,312,451
|
||||||
TOTAL
ASSETS
|
$
|
32,205,371
|
$
|
24,766,689
|
||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$
|
13,948
|
$
|
12,996
|
||||
Unearned
revenue
|
4,803
|
224,271
|
||||||
Taxes
payable
|
1,471,158
|
1,250,087
|
||||||
Accrued
liabilities and other payables
|
7,634,384
|
11,434,937
|
||||||
Advance
from officer
|
650,000
|
650,000
|
||||||
Total
current liabilities
|
9,774,293
|
13,572,291
|
||||||
CONTINGENCIES
AND COMMITMENTS
|
||||||||
DEFERRED
TAX LIABILITY, NET
|
3,475,868
|
3,551,025
|
||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Common
stock, $.00001 par value; authorized
shares
|
||||||||
100,000,000; issued
and outstanding 25,479,800 and
25,479,800
shares at September 30, 2009 and December
31,
2008, respectively
|
255
|
252
|
||||||
Additional
paid in capital
|
127,245
|
(252
|
)
|
|||||
Statutory
reserve
|
923,235
|
512,637
|
||||||
Accumulated
other comprehensive income
|
841,326
|
823,151
|
||||||
Retained
earnings
|
17,063,150
|
6,307,585
|
||||||
Total
stockholders' equity
|
18,955,211
|
7,643,373
|
||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
32,205,371
|
$
|
24,766,689
|
F-2
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
NINE
MONTHS ENDED
|
THREE
MONTHS ENDED
|
|||||||||||||||
SEPTEMBER
30,
2009
|
SEPTEMBER
30,
2008
|
SEPTEMBER
30,
2009
|
SEPTEMBER
30,
2008
|
|||||||||||||
Net
sales
|
$
|
34,534,249
|
$
|
6,651,947
|
$
|
11,227,275
|
$
|
3,452,049
|
||||||||
Cost
of goods sold
|
15,803,400
|
2,214,935
|
5,238,634
|
1,048,897
|
||||||||||||
Gross
profit
|
18,730,849
|
4,437,012
|
5,988,642
|
2,403,152
|
||||||||||||
Operating
expenses
|
||||||||||||||||
Selling
expenses
|
1,569,270
|
18,242
|
651,056
|
12,683
|
||||||||||||
General
and administrative expenses
|
939,378
|
569,472
|
191,622
|
201,609
|
||||||||||||
Research
and development expense
|
1,937,928
|
-
|
-
|
-
|
||||||||||||
Total
operating expenses
|
4,446,576
|
587,714
|
842,678
|
214,292
|
||||||||||||
Income
from operations
|
14,284,274
|
3,849,298
|
5,145,964
|
2,188,860
|
||||||||||||
Non-operating
income (expenses)
|
||||||||||||||||
Interest
income
|
5,584
|
198
|
3,968
|
31
|
||||||||||||
Financial
expense
|
(1,275
|
)
|
(4,473
|
)
|
(403
|
)
|
(3,868
|
)
|
||||||||
Other
income
|
778,094
|
343
|
256,181
|
343
|
||||||||||||
Other
expenses
|
(47,204
|
)
|
(716
|
)
|
(12,643
|
)
|
(8
|
)
|
||||||||
Total
non-operating income (expenses)
|
735,200
|
(4,648
|
)
|
247,104
|
(3,502
|
)
|
||||||||||
Income
before income tax
|
15,019,473
|
3,844,650
|
5,393,068
|
2,185,358
|
||||||||||||
Income
tax
|
3,853,312
|
352,255
|
1,414,837
|
352,255
|
||||||||||||
Net
income
|
11,166,161
|
3,492,395
|
3,978,231
|
1,833,103
|
||||||||||||
Other
comprehensive income
|
||||||||||||||||
Foreign
currency translation gain
|
18,175
|
633,512
|
11,030
|
76,268
|
||||||||||||
Comprehensive
Income
|
$
|
11,184,336
|
$
|
4,125,907
|
$
|
3,989,261
|
$
|
1,909,371
|
||||||||
Basic
and diluted weighted average shares outstanding
|
25,339,690
|
25,479,800
|
25,339,690
|
25,229,800
|
||||||||||||
Basic
and diluted net earnings per share
|
$
|
0.44
|
$
|
0.14
|
$
|
0.16
|
$
|
0.07
|
F-3
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC. AND SUBSIDIARIES
|
||||||||
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
(UNAUDITED)
|
||||||||
NINE
MONTHS ENDED
|
||||||||
SEPTEMBER
30,
2009
|
SEPTEMBER
30,
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$
|
11,166,161
|
$
|
3,492,395
|
||||
Adjustments
to reconcile net income to net cash
|
||||||||
provided
by operating activities:
|
||||||||
Depreciation
and amortization
|
881,636
|
333,702
|
||||||
Stock
issued for consulting expenses
|
127,500
|
-
|
||||||
Changes
in deferred tax
|
(78,033
|
)
|
-
|
|||||
(Increase)
decrease in current assets:
|
||||||||
Accounts
receivable
|
(329,328
|
)
|
(612,712
|
)
|
||||
Advances
to suppliers and other receivables
|
(103,775
|
)
|
14,097
|
|||||
Inventory
|
(346,268
|
)
|
20,751
|
|||||
Increase
(decrease) in current liabilities:
|
||||||||
Accounts
payable
|
942
|
12,138
|
||||||
Unearned
revenue
|
(219,552
|
)
|
4,697
|
|||||
Accrued
liabilities and other payables
|
6,024
|
3,897
|
||||||
Taxes
payable
|
219,946
|
429,827
|
||||||
Net
cash provided by operating activities
|
11,325,254
|
3,698,792
|
||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Acquisition
of property & equipment
|
(27,751
|
)
|
(34,616
|
)
|
||||
Construction
in progress
|
-
|
(44,022
|
)
|
|||||
Net
cash used in investing activities
|
(27,751
|
)
|
(78,638
|
)
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Purchase
of business
|
(3,812,466
|
)
|
(4,868,967
|
)
|
||||
Cash
acquired at purchase of business
|
-
|
10,176
|
||||||
Changes
in due from management
|
1,198,035
|
2,459,922
|
||||||
Changes
in due from related party
|
-
|
(234,408
|
)
|
|||||
Net
cash used in financing activities
|
(2,614,430
|
)
|
(2,633,277
|
)
|
||||
EFFECT
OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS
|
8,443
|
31,880
|
||||||
INCREASE
IN CASH & CASH EQUIVALENTS
|
8,691,516
|
1,018,757
|
||||||
CASH
& CASH EQUIVALENTS, BEGINNING OF PERIOD
|
16,927
|
117,240
|
||||||
CASH
& CASH EQUIVALENTS, END OF PERIOD
|
$
|
8,708,443
|
$
|
1,135,997
|
||||
Supplemental
Cash flow data:
|
||||||||
Income
tax paid
|
$
|
3,318,514
|
$
|
-
|
||||
Interest
paid
|
$
|
-
|
$
|
-
|
F-4
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 (UNAUDITED) AND DECEMBER 31, 2008 (AUDITED)
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
Weikang
Bio-Technology Group Co., Inc., a Nevada corporation (“Weikang” or “the Company)
was incorporated on May 12, 2004 in Florida as Expedition Leasing, Inc.
(“Expedition”). The Company reincorporated to Nevada and changed to its present
name on July 12, 2008, pursuant to a merger with Weikang, a wholly-owned
subsidiary, with Weikang as the surviving entity. The Company is engaged in
the development, manufacture and distribution of Traditional Chinese Medicine
("TCM") through its indirect wholly-owned operating subsidiary,
Heilongjiang Weikang Biotechnology Group Co., Ltd. (“Heilongjiang Weikang”) in
the People’s Republic of China (“PRC” or “China”).
On
December 7, 2007, the Company (as Expedition) entered into an exchange agreement
with Sinary Bio-Technology Holdings Group, Inc., a Nevada corporation (“Sinary”)
and its sole shareholder (the “Sinary Stockholder”), pursuant to which the
Company issued 24,725,200 shares of its common stock to the Sinary Stockholder
for all of the issued and outstanding common shares of Sinary. Concurrently,
Sinary paid $650,000 to certain former shareholders of the Company, who
surrendered 24,725,200 shares of the Company’s common stock held by them to the
Company for cancellation. As a result, the Sinary Stockholder currently owns 98%
of the Company. On the Closing Date, Sinary became a wholly-owned
subsidiary of the Company.
Prior to
the acquisition of Sinary, the Company was a non-operating public shell
corporation. Pursuant to Securities and Exchange Commission (“SEC”) rules, the
merger or acquisition of a private operating company into a non-operating public
shell corporation with nominal net assets is considered a capital transaction in
substance, rather than a business combination. Accordingly, for accounting
purposes, the transaction was treated as a reverse acquisition and
recapitalization, and pro forma information is not presented. Transaction costs
incurred in the reverse acquisition were expensed.
Sinary
was incorporated under the laws of the State of Nevada on August 31, 2007. On
October 25, 2007, Sinary entered into an equity interests transfer agreement
with the stockholders of Heilongjiang Weikang, a limited liability company in
the PRC, to acquire 100% of the equity interests of Heilongjiang Weikang for 57
million Renminbi (“RMB”), or approximately 7.6 million US dollars.
Heilongjiang
Weikang was incorporated in the Heilongjiang Province, PRC on March 29,
2005, and was formerly known as Heilongjiang Province Weikang Bio-Engineering
Co., Ltd. Heilongjiang Weikang is engaged in development, manufacture and
distribution of Traditional Chinese Medicine ("TCM") in the
PRC.
On July
22, 2008, Heilongjiang Weikang completed the acquisition of 100% of the issued
and outstanding equity interests of Tianfang (Guizhou) Pharmaceutical Co., Ltd.
(“Tianfang”), a Chinese limited liability company, for $15,000,000 (the
“Consideration”), pursuant to a stock transfer agreement entered into on June
30, 2008 by and among the Heilongjiang Weikang, Tianfang, and Tianfang’s two
shareholders: Beijing Shiji Qisheng Trading Co., Ltd., a Chinese limited
liability company (“Shiji Qisheng”) and Tri-H Trade (U.S.A.) Co., Ltd., a
California corporation (“Tri-H”, and together with Shiji Qisheng collectively as
the “Selling Shareholders”).
Tianfang
was incorporated in the Guizhou Province, PRC in 1998. Tianfang is
engaged in the development, manufacture and distribution of OTC
Pharmaceuticals. The Company believes its market share can be
expanded to the southern part of China through the acquisition of
Tianfang.
The
unaudited financial statements were prepared by the Company pursuant
to the rules and regulations of the SEC. The information furnished herein
reflects all adjustments (consisting of normal recurring accruals and
adjustments) which are, in the opinion of management, necessary to fairly
present the operating results for the respective periods. Certain information
and footnote disclosures normally presented in annual financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America were omitted pursuant to such rules and regulations.
These financial statements should be read in conjunction with the
audited financial statements and footnotes included in the
Company’s 2008 audited financial statements. The results for the nine
months ended September 30, 2009 do not necessarily indicate the results for the
full year ended December 31, 2009.
F-5
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICY
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Sinary, and the results of operations
of Weikang, Sinary’s wholly-owned subsidiary;, Tianfang, Weikang’s wholly-owned
subsidiary from the date of acquisition (August 1, 2008). All significant
inter-company accounts and transactions were eliminated in
consolidation.
Use
of Estimates
In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America (“US GAAP”), management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting year. Significant estimates, required by
management, include the recoverability of long-lived assets, allowance for
doubtful accounts, and the reserve for obsolete and slow-moving inventories.
Actual results could differ from those estimates.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all highly liquid
investments with an original maturity of three months or less as cash
equivalents.
Accounts
Receivable
The
Company’s policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. There was no bad debt allowance
recorded based on the Company’s past payment collection experience.
Inventory
Inventories
are valued at a lower cost or market with cost determined on a moving weighted
average basis. Costs of work in progress and finished goods comprise direct
material, direct production cost and an allocated portion of production
overheads.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures
for maintenance and repairs are expensed as incurred; additions, renewals and
betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in
operations. Depreciation of property and equipment is provided using the
straight-line method for all assets with estimated lives ranging from 3 to 20
years as follows:
Building
|
20
years
|
Vehicle
|
5
years
|
Office
Equipment
|
3-7
years
|
Production
Equipment
|
3-10
years
|
Land
Use Right
Right to
use land is stated at cost less accumulated amortization. Amortization is
provided using the straight-line method over 50 years.
Impairment
of Long-Lived Assets
Long-lived
assets, which include property, plant and equipment and intangible assets, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability
of long-lived assets to be held and used is measured by a comparison between the
carrying amount of an asset and the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge is
the amount that the carrying amount of the asset exceeds the fair value of the
assets. Fair value is generally determined by the asset’s expected future
discounted cash flows or market value, if readily determinable. Based on its
review, the Company believes that, as of September 30, 2009 and December 31,
2008, there were no significant impairments of its long-lived
assets.
F-6
Income
Taxes
The
Company uses Statement of Financial Accounting Standards (“SFAS”) No. 109,
“Accounting for Income Taxes,” codified in FASB ASC Topic 740, which
requires recognition of deferred tax assets and liabilities for expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income taxes are considered as the
tax consequences in future years for differences between the tax bases of assets
and liabilities and their financial reporting amounts at each period end based
on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes at inception of the business (codified in FASB ASC
Topic 740) on August 31, 2007. Based on FIN 48, the Company made a
comprehensive review of its portfolio of tax positions in accordance with
recognition standards established by FIN 48. Based on FIN 48, the Company
recognized no material adjustments to liabilities or stockholders’ equity. When
tax returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the positions taken or the amount of the
positions that would be ultimately sustained. The benefit of a tax position is
recognized in the financial statements in the period during which, based on all
available evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely to be realized upon settlement
with the applicable taxing authority. The portion of the benefits associated
with tax positions taken that exceeds the amount measured as described above is
reflected as a liability for unrecognized tax benefits in the accompanying
balance sheets along with any associated interest and penalties that would be
payable to the taxing authorities upon examination. Interests
associated with unrecognized tax benefits are classified as interest expenses
and penalties are classified in selling, general and administrative expenses in
the statements of income. At September 30, 2009 and December 31,
2008, the Company did not take any uncertain positions that would necessitate
recording of tax related liability.
F-7
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 (UNAUDITED) AND DECEMBER 31, 2008 (AUDITED)
Revenue
Recognition
The
Company's revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin (“SAB”) 104, codified in FASB ASC Topic
480. Sales revenue is recognized at the date of shipment to customers
when a formal arrangement exists, the price is fixed or determinable, the
delivery is completed, no other significant obligations of the Company exist and
collectability is reasonably assured. Payments received before all the relevant
criteria for revenue recognition is met are recorded as unearned
revenue.
Sales
revenue represents the invoiced value of goods, which is subject to net of
value-added tax (“VAT”). All of the Company’s products are sold in the PRC and
are subject to Chinese value-added tax of 17% of the gross sales price. This VAT
may be offset by VAT paid by the Company on raw materials and other materials
included in the cost of producing their end product. The Company recorded VAT
payable and VAT receivable net of payments in the financial statements. The VAT
tax return is filed offsetting the payables against the
receivables.
Sales and
purchases are recorded net of VAT collected and paid as the Company acts as an
agent for the government. VAT taxes are not affected by the income
tax holiday.
Sales
returns and allowances was $0 for the nine and three months ended September
30, 2009 and 2008. The Company does not provide unconditional right of
return, price protection or any other concessions to its dealers or other
customers.
Cost
of Goods Sold
Cost of
goods sold consists primarily of material costs, employee compensation,
depreciation and related expenses, which are directly attributable to the
production of products. Write-down of inventory to lower cost or market is
also recorded in cost of goods sold.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to credit risk consist
primarily of accounts receivable and other receivables. The Company does not
require collateral or other security to support these receivables. The Company
conducts periodic reviews of its clients' financial condition and customer
payment practices to minimize collecting risk on accounts
receivable.
The
operations of the Company are located in the PRC. Accordingly, the Company's
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, as well as by the
overall performance of the PRC’s economy.
Statement
of Cash Flows
In
accordance with SFAS No. 95, “Statement of Cash Flows,” codified in FASB ASC
Topic 230, cash flows from the Company's operations are calculated based upon
local currencies. As a result, amounts related to assets and liabilities
reported on the statement of cash flows may not necessarily agree with changes
in the corresponding balances on the balance sheet. Cash flows from operating,
investing and financing activities exclude the effect of the acquisition of
Tianfang in 2008.
Fair
Value of Financial Instruments
SFAS No.
107, “Disclosures about Fair Value of Financial Instruments,” codified in FASB
ASC Financial Instruments, Topic 825, requires the Company disclose estimated
fair values of financial instruments. The carrying amounts reported in the
statements of financial position for current assets and current liabilities
qualifying as financial instruments are a reasonable estimate of fair
value.
Fair
Value Measurements
On
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,”
codified in FASB ASC Financial Instruments, Topic 820. SFAS 157 defines fair
value, establishes a three-level valuation hierarchy for disclosures of fair
value measurement and enhances disclosures requirements for fair value
measures. The three levels are defined as follow:
·
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
·
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
·
|
Level
3 inputs to the valuation methodology are unobservable and significant to
the fair value measurement.
|
As of
September 30, 2009, the Company did not identify any assets and liabilities that
are required to be presented on the balance sheet at fair value.
Foreign
Currency Translation and Comprehensive Income (Loss)
The
Company’s functional currency is the Renminbi (“RMB”). For financial reporting
purposes, RMB were translated into United States Dollars ("USD") as the
reporting currency. Assets and liabilities are translated at the exchange rate
in effect at the balance sheet date. Revenues and expenses are translated at the
average rate of exchange prevailing during the reporting period. Translation
adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders' equity as "Accumulated other
comprehensive income".
Gains and
losses resulting from foreign currency transactions are included in income.
There has been no significant fluctuation in exchange rate for the conversion of
RMB to USD after the balance sheet date.
The
Company uses SFAS No 130, “Reporting Comprehensive Income,” codified in FASB ASC
Topic 220. Comprehensive income is comprised of net income and all changes to
the statements of stockholders’ equity, except the changes in paid-in capital
and distributions to stockholders due to investments by stockholders.
Comprehensive income for the nine and three months ended September 30, 2009 and
2008 included net income and foreign currency translation
adjustments.
Stock-Based
Compensation
The
Company accounts for its stock-based compensation in accordance with SFAS No.
123R, “Share-Based Payment, an Amendment of FASB Statement No.
123,” codified in FASB ASC Topic 718. The Company recognizes in the
statement of operations the grant-date fair value of stock options and other
equity-based compensation issued to employees and non-employees.
Basic
and Diluted Earnings per Share (EPS)
Basic EPS
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed similarly to basic net income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Diluted net earnings per share is based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period. For the nine and three months ended September 30, 2009 and
2008, the Company did not have any dilutive securities.
Segment
Reporting
SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
requires a use of the “management approach” model for segment reporting,
codified in FASB ASC Topic 280. The management approach model is based on the
way a company's management organizes segments within the company for making
operating decisions and assessing performance. Reportable segments are based on
products and services, geography, legal structure, management structure, or
any other manners in which management disaggregates a company.
SFAS
131 has no effect on the Company's financial statements as substantially all of
the Company's operations are conducted in one industry segment. The Company has
one reportable business segment. All of the Company's assets are located in the
PRC.
F-8
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 (UNAUDITED) AND DECEMBER 31, 2008 (AUDITED)
Research
and Development
Research
and development costs are related primarily to the development of new
nutritional and health supplements products. Research and development costs are
expensed as incurred. For the nine and three months ended September 30, 2009,
the research and development expense was $1,939,000. For the nine and three
months ended September 30, 2008, research and development expense was
$0.
On
January 20, 2009, the Company made an agreement with Botany medicine research
center of Northeast Forestry University (“the University”) to develop
certain new medicine and health supplemental products. The Company is
responsible for funding the research and development expense and project
examination and registration fee of RMB 15,000,000 (or $2,195,000). According to
the contract, upon successful completion of the research by the University, the
Company is required to pay 85% of total fund to the University and will own the
rights to the research findings, and is required to pay the remaining 15% upon
registration and approval of the researching findings from State Food and Drug
Administration and Department of Public Health of Heilongjiang Province.
The Company is responsible for registration of the research findings and getting
approval from related authorities. In case the registration
application is not approved by the authorities, the Company will not be entitled
to the refund of the amount it already paid and will not be required to pay the
remaining 15% or RMB 2,300,000 ($336,000). During the second quarter of
2009, the research and development of the new medicine and health supplemental
products was completed successfully. During the term of the contract, the
Company paid RMB 12,700,000 (or $1,859,000) to the University and obtained the
ownership rights of the research findings. The Company is registering the
research findings with the related authorities. The Company recorded
the payment for the R&D project as R&D expense.
Reclassifications
Certain
prior year amounts were reclassified to conform to the manner of presentation in
the current year.
New
Accounting Pronouncements
On July
1, 2009, the Company adopted Accounting Standards Update (“ASU”) No.
2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments
based on Statement of Financial Accounting Standards No. 168 , “The FASB
Accounting Standards Codification™ and the Hierarchy of Generally Accepted
Accounting Principles” (“ASU No. 2009-01”). ASU No. 2009-01
re-defines authoritative GAAP for nongovernmental entities to be only comprised
of the FASB Accounting Standards Codification™ (“Codification”) and, for SEC
registrants, guidance issued by the SEC. The Codification is a
reorganization and compilation of all then-existing authoritative GAAP for
nongovernmental entities, except for guidance issued by the SEC. The
Codification is amended to effect non-SEC changes to authoritative
GAAP. Adoption of ASU No. 2009-01 only changed the referencing
convention of GAAP in Notes to the Consolidated Financial
Statements.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (“SFAS 167”), codified as FASB ASC Topic 810-10, which modifies how a
company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. SFAS 167
clarifies that the determination of whether a company is required to consolidate
an entity is based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly
impact the entity’s economic performance. SFAS 167 requires an ongoing
reassessment of whether a company is the primary beneficiary of a variable
interest entity. SFAS 167 also requires additional disclosures about a company’s
involvement in variable interest entities and any significant changes in risk
exposure due to that involvement. SFAS 167 is effective for fiscal years
beginning after November 15, 2009. The Company does not believe the adoption of
SFAS 167 will have an impact on its financial condition, results of operations
or cash flows.
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets — an amendment of FASB Statement No. 140” (“SFAS 166”), codified as FASB
Topic ASC 860, which requires entities to provide more information regarding
sales of securitized financial assets and similar transactions, particularly if
the entity has continuing exposure to the risks related to transferred financial
assets. SFAS 166 eliminates the concept of a “qualifying special-purpose
entity,” changes the requirements for derecognizing financial assets and
requires additional disclosures. SFAS 166 is effective for fiscal years
beginning after November 15, 2009. The Company does not believe the adoption of
SFAS 166 will have an impact on its financial condition, results of operations
or cash flows.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”) codified in
FASB ASC Topic 855-10-05, which provides guidance to establish general standards
of accounting for and disclosures of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
SFAS 165 also requires entities to disclose the date through which subsequent
events were evaluated as well as the rationale for why that date was selected.
SFAS 165 is effective for interim and annual periods ending after June 15, 2009,
and accordingly, the Company adopted this pronouncement during the second
quarter of 2009. SFAS 165 requires that public entities evaluate subsequent
events through the date that the financial statements are issued. The Company
has evaluated subsequent events through November 18, 2009.
In April
2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1, “Interim Disclosures
about Fair Value of Financial Instruments,” which is codified in FASB ASC Topic
825-10-50. This FSP essentially expands the disclosure about fair value of
financial instruments that were previously required only annually to also be
required for interim period reporting. In addition, the FSP requires certain
additional disclosures regarding the methods and significant assumptions used to
estimate the fair value of financial instruments. These additional disclosures
are required beginning with the quarter ending June 30, 2009. This FSP had no
material impact on the Company’s financial position, results of operations or
cash flows.
In
April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition
and Presentation of Other-Than-Temporary Impairments,” which is codified in FASB
ASC Topic 320-10. This FSP modifies the requirements for recognizing
other-than-temporarily impaired debt securities and changes the existing
impairment model for such securities. The FSP also requires additional
disclosures for both annual and interim periods with respect to both debt and
equity securities. Under the FSP, impairment of debt securities will be
considered other-than-temporary if an entity (1) intends to sell the security,
(2) more likely than not will be required to sell the security before recovering
its cost, or (3) does not expect to recover the security’s entire amortized cost
basis (even if the entity does not intend to sell). The FSP further indicates
that, depending on which of the above factor(s) causes the impairment to be
considered other-than-temporary, (1) the entire shortfall of the security’s fair
value versus its amortized cost basis or (2) only the credit loss portion would
be recognized in earnings while the remaining shortfall (if any) would be
recorded in other comprehensive income. FSP 115-2 requires entities to initially
apply the provisions of the standard to previously other-than-temporarily
impaired debt securities existing as of the date of initial adoption by making a
cumulative-effect adjustment to the opening balance of retained earnings in the
period of adoption. The cumulative-effect adjustment potentially reclassifies
the noncredit portion of a previously other-than-temporarily impaired debt
security held as of the date of initial adoption from retained earnings to
accumulate other comprehensive income. The Company adopted FSP No. SFAS 115-2
and SFAS 124-2 beginning April 1, 2009. This FSP had no material impact on the
Company’s financial position, results of operations or cash flows.
In April
2009, the Financial Accounting Standards Board (“FASB”) issued FSP
No. SFAS 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly” (“FSP No. SFAS 157-4”). FSP
No. SFAS 157-4, which is codified in FASB ASC Topics 820-10-35-51 and
820-10-50-2, provides additional guidance for estimating fair value and
emphasizes that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the same.
The Company adopted FSP No. SFAS 157-4 beginning April 1, 2009.
This FSP had no material impact on the Company’s financial position, results of
operations or cash flows.
F-9
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 (UNAUDITED) AND DECEMBER 31, 2008 (AUDITED)
3.
INVENTORY
Inventory
at September 30, 2009 and December 31, 2008 was as follows:
2009
|
2008
|
|||||||
Raw
materials
|
$ | 153,475 | $ | 33,676 | ||||
Packing
materials
|
62,676 | 22,409 | ||||||
Finished
goods
|
282,340 | 95,857 | ||||||
Total
|
$ | 498,491 | $ | 151,942 |
4.
PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following at September 30, 2009 and December 31,
2008:
2009
|
2008
|
|||||||
Building
|
$ | 8,250,431 | $ | 8,244,669 | ||||
Building
improvements
|
912,208 | 911,462 | ||||||
Production
equipment
|
2,332,685 | 2,319,654 | ||||||
Office
furniture and equipment
|
183,088 | 179,752 | ||||||
Vehicles
|
118,545 | 118,448 | ||||||
11,796,957 | 11,773,985 | |||||||
Less:
Accumulated depreciation
|
(1,392,299 | ) | (675,939 | ) | ||||
$ | 10,404,658 | $ | 11,098,046 |
Depreciation
for the nine months ended September 30, 2009 and 2008 was $730,000 and
$291,000, respectively; and for the three months ended September 30, 2009 and
2008 was $244,000 and $153,000, respectively.
5.
ADVANCES TO SUPPLIERS AND OTHER RECEIVABLES
Advances
to suppliers represented prepayment for the raw material. Other
receivables represented cash advances to employees and sales representatives for
normal business purposes such as advances for traveling expense.
6.
RELATED PARTY TRANSACTIONS
Due
from Management
At
September 30, 2009, due from management represented advance payment of $65,417
to one of the Company’s officers for his paying certain expenses relating to the
Company’s daily operations.
At
December 31, 2008, due from management represented lease payments received by
Weikang’s CEO on behalf of Weikang for leasing out to a third party the workshop
of manufacturing the royal jelly and the right to use its technology for
manufacturing the royal jelly for the period from January 1, 2008 through June
30, 2010. During 2008, Weikang’s CEO received lease income of
approximately $1,008,000 (RMB 7,000,000) and prepaid lease payment of
approximately $219,000 (RMB 1,500,000) on behalf of the Company.
Advance
from Officer
Advance
from officer represented the payment of $650,000 made by an officer of
Heilongjiang Weikang on behalf of Sinary to certain former shareholders of
the Company in connection with the reverse acquisition between the Company
and Sinary on December 7, 2007. The advance from officer bears no
interest and payable on demand.
7. INTANGIBLE
ASSETS
Intangible
assets consisted of the following at September 30, 2009 and December 31,
2008:
2009
|
2008
|
|||||||
|
|
|||||||
Land
use right
|
$ | 8,730,564 | $ | 8,723,411 | ||||
Goodwill
arising from acquisition of Tianfang
|
3,581,294 | 3,578,359 | ||||||
Software
|
7,215 | 7,209 | ||||||
12,319,073 | 12,308,979 | |||||||
Less:
Accumulated amortization
|
(246,435 | ) | (94,574 | ) | ||||
$ | 12,072,638 | $ | 12,214,405 |
All land
in the PRC is government owned and cannot be sold to any individual or company.
However, the government grants the user a “land use right” to use the land. The
Company has the right to use the land for 50 years and amortizes the right on a
straight-line basis for 50 years.
Amortization
for the nine months ended September 30, 2009 and 2008 was $152,000 and $41,000,
respectively. Amortization for the three months ended September 30, 2009
and 2008 was $51,000 and $35,000, respectively. Amortization for the next five
years from September 30, 2009 is expected to be $204,000, $204,000, $204,000,
$204,000 and $204,000 respectively.
8. MAJOR CUSTOMERSAND
VENDORS
There
were no customers which accounted for over 10% of the Company’s sales for the
nine and three months ended September 30, 2009.
Five and
three customers which are dealers for the Company collectively
accounted for 70% and 32% of the Company’s sales for the nine and three
months ended September 30, 2008, respectively. These customers accounted
for about 18%, 16%, 13%, 12% & 11% of the sales for the nine months ended
September 30, 2008, respectively. Three customers accounted for about 11%, 11%,
and 10% of the sales for the three months ended September 30, 2008,
respectively. At September 30, 2008, the total receivable balance due from these
five customers was $0.
Three
vendors collectively provided approximately 41% and 49% of the Company’s
purchase of raw materials for the nine and three months ended September 30,
2009, respectively. Each vendor accounted for 19%, 12%, and 10% of
the purchases for the nine months ended September 30, 2009, and 26%, 12%, and
12% for the three months ended September 30, 2009, respectively. The Company did
not have accounts payable to these vendors at September 30, 2009.
Five and
one vendor collectively provided 57% and 10% of the Company’s purchase of
raw materials for the nine and three months ended September 30, 2008,
respectively. These vendors counted for about 13%, 12%, 11%, 11%, and 10% of the
purchases for the nine months ended September 30, 2008, respectively. The
Company did not have accounts payable to these vendors at September 30,
2008.
F-10
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 (UNAUDITED) AND DECEMBER 31, 2008 (AUDITED)
9.
TAXES PAYABLE
Taxes
payable consisted of the following at September 30, 2009 and December 31,
2008:
2009
|
2008
|
|||||||
Income
tax payable
|
$ | 995,065 | $ | 381,659 | ||||
Value
added tax payable
|
445,579 | 306,012 | ||||||
Individual
income tax withholding payable
|
23 | 504,123 | ||||||
Sales
tax payable
|
16,474 | 51,210 | ||||||
Other
taxes
|
14,017 | 7,083 | ||||||
$ | 1,471,158 | $ | 1,250,087 |
10.
OTHER PAYABLES
At
September 30, 2009, other payables mainly consisted of approximately $7.62
million that Sinary was obligated to pay to Heilongjiang Weikang’s former owners
within one year from the closing of the acquisition of Heilongjiang Weikang.
This payable does not bear any interest, and has been renewed to June 30,
2010.
At
December 31, 2008, other payables consisted of $7.62 million purchase price of
Heilongjiang Weikang and the unpaid portion of the purchase price of
approximately $3.8 million Heilongjiang Weikang was obligated to pay to
Tianfang’s former owners within one year from the closing of acquisition
date. The $3.8 million was paid during the first quarter of
2009.
11.
DEFFERED TAX LIABILITY, NET
Deferred
tax represented differences between the tax bases and book bases of property,
equipment and land use right.
At
September 30, 2009 and December 31, 2008, deferred tax asset (liability)
consisted of the following:
2009
|
2008
|
|||||||
Deferred
tax asset on property and equipment for bases differences
|
$ | 115,857 | $ | 37,758 | ||||
Deferred
tax asset arising from the acquisition of Heilongjiang
Weikang
|
29,616 | 29,591 | ||||||
Deferred
tax liability arising from the acquisition of Tianfang
|
(3,621,341 | ) | (3,618,374 | ) | ||||
Deferred
tax liability, net
|
$ | (3,475,868 | ) | $ | (3,551,025 | ) |
12.
INCOME TAXES
Heilongjiang
Weikang and Tianfang are governed by the Income Tax Law of the PRC concerning
the private enterprises that are generally subject to tax at a statutory rate of
25% (33% prior to 2008) on income reported in the statutory financial statements
after appropriate tax adjustments. Heilongjiang Weikang was exempt
from income tax for three years from 2006 to 2008. Tianfang is subject to 25%
income tax rate.
Sinary
had no operations for the nine months ended September 30, 2009 and
2008.
Foreign
pretax earnings approximated $14,892,000 and $3,845,000 for the nine months
ended September 30, 2009 and 2008 respectively. Pretax earnings of a foreign
subsidiary are subject to U.S. taxation when effectively repatriated. The
Company provides income taxes on the undistributed earnings of non-U.S.
subsidiaries except to the extent that such earnings are indefinitely invested
outside the United States. At September 30, 2009, $17,841,000 of accumulated
undistributed earnings of non-U.S. subsidiaries was indefinitely invested. At
the existing U.S. federal income tax rate, additional taxes of $1,606,000 would
have to be provided if such earnings were remitted currently.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the nine and three months ended September 30, 2009 and
2008:
Nine Months Ended
September 30,
|
Three Months Ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
US
statutory rates
|
34 | % | 34 | % | 34 | % | 34 | % | ||||||||
Tax
rate difference
|
(9 | )% | (9 | )% | (9 | )% | (9 | )% | ||||||||
Effect
of tax holiday
|
- | % | (16 | )% | - | % | (9 | )% | ||||||||
Other
|
1 | % | ||||||||||||||
Tax
per financial statements
|
25 | % | 9 | % | 26 | % | 16 | % |
13.
STATUTORY RESERVES
Pursuant
to the new corporate law of the PRC effective on January 1, 2006, the Company is
now only required to maintain one statutory reserve by appropriating from its
after-tax profit before declaration or payment of dividends. The statutory
reserve represents restricted retained earnings.
Surplus
Reserve Fund
The
Company is now only required to transfer 10% of its net income, as determined
under the PRC accounting rules and regulations, to a statutory surplus reserve
fund until such reserve balance reaches 50% of the Company’s registered
capital.
The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered
capital.
Common
Welfare Fund
Common
welfare fund is a voluntary fund that the Company can elect to transfer 5% to
10% of its net income to this fund. This fund can only be utilized on capital
items for the collective benefit of the Company’s employees, such as
construction of dormitories, cafeteria facilities, and other staff welfare
facilities. This fund is non-distributable other than upon
liquidation.
14.
CONTINGENCIES
The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company’ s operations may be adversely affected by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of taxation,
among other things.
The
Company’s sales, purchases and expenses transactions are denominated in RMB and
all of the Company’s assets and liabilities are also denominated in RMB. The RMB
is not freely convertible into foreign currencies under the current law. In
China, foreign exchange transactions are required by law to be conducted only by
authorized financial institutions. Remittances in currencies other than RMB may
require certain supporting documentation in order to affect the
remittance.
15.
ACQUISITION OF TIANFANG AND UNAUDITED PRO FORMA INFORMATION
On July
22, 2008, Heilongjiang Weikang completed the acquisition of 100% of the issued
and outstanding equity interests of Tianfang for $15,000,000 (RMB
102,886,500). For convenience of reporting the acquisition for
accounting purposes, August 1, 2008 was designated as the acquisition
date.
The
following table summarizes the fair values of the assets acquired and
liabilities assumed of Tianfang, at the date of acquisition. The
total consideration for acquisition exceeded fair value of the net assets
acquired by $3,565,578. The excess was recorded as goodwill.
Cash
|
$ | 10,146 | ||
Accounts
receivable
|
388,641 | |||
Other
receivables
|
3,988 | |||
Inventory
|
45,161 | |||
Property
and equipment
|
7,194,302 | |||
Land
use right
|
8,117,686 | |||
Goodwill
|
3,565,578 | |||
Tax
payable
|
(498,259 | ) | ||
Advances
from shareholder
|
(221,794 | ) | ||
Deferred
tax liability
|
(3,605,449 | ) | ||
Purchase
price
|
$ | 15,000,000 |
The
intangible asset, which is principally land use rights, is being amortized over
50 years.
The
following unaudited pro forma consolidated results of continuing operations for
Heilongjiang Weikang and Tianfang for the nine months ended September 30, 2008
presents the operations of Heilongjiang Weikang and Tianfang as if the
acquisitions occurred on January 1, 2008. The pro forma results are
not necessarily indicative of the actual results that would have occurred had
the acquisitions been completed as of the beginning of the periods presented,
nor are they necessarily indicative of future consolidated results.
Pro
forma
|
||||
Net
Revenue
|
$ | 7,765,940 | ||
Cost
of Revenue
|
2,833,037 | |||
Gross
Profit
|
4,932,903 | |||
Operating
expenses:
|
||||
Selling
expenses
|
22,182 | |||
General
and administrative expenses
|
880,168 | |||
Total
operating expenses
|
902,350 | |||
Income
from operations
|
4,030,553 | |||
Total
non-operating expenses
|
(5,361 | ) | ||
Income
before income tax
|
4,025,192 | |||
Income
tax
|
397,547 | |||
Net
income
|
$ | 3,627,645 | ||
Basic
and diluted weighted average shares outstanding
|
25,229,800 | |||
Basic
and diluted net earnings per share
|
$ | 0.14 |
F-11
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the
shareholders
Weikang Bio-Technology Group
Company, Inc.
We have audited the
consolidated
balance sheet of Weikang Bio-Technology Group Company, Inc. and subsidiaries (Formerly known as
Expedition Leasing, Inc.). (the “Company”) as of December 31, 2008 and
2007, and the related consolidated statements of operations and other
comprehensive income, shareholders equity (deficiency) and cash flows for the
year ended December 31, 2008 and
for the period from inception( August 31, 2007 ) to December 31,
2007. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our
audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged
to perform, an audit of internal control over financial reporting. Our audit
included consideration of internal control over financial reporting
as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the
statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company as of December 31, 2008 and
2007, and the consolidated results of its operations and its cash flows for the
year ended December 31, 2008 and for the period from inception (August 31, 2007)
to December 31, 2007 in conformity with U.S. generally accepted accounting
principles.
Goldman Parks Kurland Mohidin
LLP
Encino,
California
March 1,
2009
F-12
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC. AND SUBSIDIARIES
|
CONSOLIDATED BALANCE
SHEETS
|
|
DECEMBER
31,
|
DECEMBER
31,
|
||||||
2008
|
2007
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
& cash equivalents
|
$ | 16,927 | $ | 117,240 | ||||
Accounts
receivable
|
- | 25,711 | ||||||
Advances
to suppliers and other receivables
|
41,697 | 139,115 | ||||||
Inventory
|
151,942 | 199,160 | ||||||
Due
from management
|
1,243,672 | 2,818,265 | ||||||
Due
from related party
|
- | 135,777 | ||||||
Total
current assets
|
1,454,238 | 3,435,268 | ||||||
NONCURRENT
ASSETS
|
||||||||
Property
and equipment, net
|
11,098,046 | 3,771,188 | ||||||
Construction
in progress
|
- | 275,832 | ||||||
Intangible
assets
|
12,214,405 | 538,355 | ||||||
Deferred
tax asset
|
- | 27,726 | ||||||
Total
noncurrent assets
|
23,312,451 | 4,613,101 | ||||||
TOTAL
ASSETS
|
$ | 24,766,689 | $ | 8,048,369 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$ | 12,996 | $ | 24,417 | ||||
Unearned
revenue
|
224,271 | - | ||||||
Taxes
payable
|
1,250,087 | - | ||||||
Accrued
liabilities and other payables
|
11,434,937 | 7,627,907 | ||||||
Advance
from officer
|
650,000 | 650,000 | ||||||
Total
current liabilities
|
13,572,291 | 8,302,324 | ||||||
CONTINGENCIES
AND COMMITMENTS
|
||||||||
DEFERRED
TAX LIABILITY
|
3,551,025 | - | ||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Common
stock, $.00001 par value; authorized shares
100,000,000; issued and outstanding 25,229,800
shares
|
252 | 252 | ||||||
Additional
paid in capital
|
(252 | ) | (252 | ) | ||||
Statutory
reserve
|
512,637 | 19,961 | ||||||
Accumulated
other comprehensive income
|
823,151 | 196,432 | ||||||
Retained
earnings (accumulated deficit)
|
6,307,585 | (470,348 | ) | |||||
Total
stockholders' equity
|
7,643,373 | (253,955 | ) | |||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 24,766,689 | $ | 8,048,369 |
F-13
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
|
|
FOR THE
YEAR
ENDED
|
FROM
INCEPTION
AUGUST 31
|
||||||
|
DECEMBER
31, 2008
|
TO
DECEMBER
31, 2007
|
||||||
Net
sales
|
$ | 12,852,884 | $ | 823,602 | ||||
Cost
of goods sold
|
4,584,093 | 390,523 | ||||||
Gross
profit
|
8,268,791 | 433,079 | ||||||
Operating
expenses
|
||||||||
Selling
expenses
|
351,840 | 37,035 | ||||||
General
and administrative expenses
|
857,158 | 192,587 | ||||||
Total
operating expenses
|
1,208,998 | 229,622 | ||||||
Income
from operations
|
7,059,793 | 203,457 | ||||||
Non-operating
income (expenses)
|
||||||||
Interest
income
|
997 | 1,169 | ||||||
Financial
expense
|
(4,973 | ) | (1,443 | ) | ||||
Other
income
|
1,032,896 | - | ||||||
Other
expenses
|
(69,185 | ) | (653,570 | ) | ||||
Total
non-operating income (expenses)
|
959,735 | (653,844 | ) | |||||
Income
(loss) before income tax
|
8,019,528 | (450,387 | ) | |||||
Income
tax
|
748,919 | - | ||||||
Net
income (loss)
|
7,270,609 | (450,387 | ) | |||||
Other
comprehensive income (loss)
|
||||||||
Foreign
currency translation gain
|
626,719 | 196,432 | ||||||
Comprehensive
Income (loss)
|
$ | 7,897,328 | $ | (253,955 | ) | |||
Basic
and diluted weighted average shares outstanding
|
25,229,800 | 24,822,865 | ||||||
Basic
and diluted net earnings per share
|
$ | 0.29 | $ | (0.02 | ) |
F-14
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
|
FROM
INCEPTION (AUGUST 31, 2007)
TO DECEMBER 31, 2008
|
Common
Stock Shares
|
Amount
|
Additional
paid in
capital
|
Statutory reserves
|
Other
comprehensive
income
|
Retained
Earnings /
(Accumulated
Deficit)
|
Total
|
||||||||||||||||||||||
Balance at August
31, 2007
|
24,725,200 | $ | 247 | $ | (247 | ) | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
Recapitalization
on reverse acquisition
|
504,600 | 5 | (5 | ) | - | - | - | - | ||||||||||||||||||||
Net
loss for the period
|
- | - | - | - | - | (450,387 | ) | (450,387 | ) | |||||||||||||||||||
Transfer
to statutory reserves
|
- | - | - | 19,961 | - | (19,961 | ) | - | ||||||||||||||||||||
Foreign
currency translation gain
|
- | - | - | - | 196,432 | - | 196,432 | |||||||||||||||||||||
Balance
at December 31, 2007
|
25,229,800 | $ | 252 | $ | (252 | ) | $ | 19,961 | $ | 196,432 | $ | (470,348 | ) | $ | (253,955 | ) | ||||||||||||
Net
income for the year
|
- | - | - | - | - | 7,270,609 | 7,270,609 | |||||||||||||||||||||
Transfer
to statutory reserves
|
- | - | - | 492,676 | - | (492,676 | ) | - | ||||||||||||||||||||
Foreign
currency translation gain
|
- | - | - | - | 626,719 | 626,719 | ||||||||||||||||||||||
Balance
at December 31, 2008
|
25,229,800 | $ | 252 | $ | (252 | ) | $ | 512,637 | $ | 823,151 | $ | 6,307,585 | $ | 7,643,373 |
F-15
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF CASH
FLOWS
|
FOR THE
YEAR
ENDED
|
FROM
INCEPTION
AUGUST 31
|
|||||||
DECEMBER
31, 2008
|
TO
DECEMBER
31, 2007
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income (loss)
|
$ | 7,270,609 | $ | (450,387 | ) | |||
Adjustments to reconcile net
income (loss) to net cash provided by (used in) operating
activities:
|
||||||||
Depreciation
and amortization
|
1,338,326 | 45,269 | ||||||
Changes
in deferred tax
|
(38,104 | ) | - | |||||
(Increase)
decrease in current assets:
|
||||||||
Accounts
receivable
|
416,885 | (15,640 | ) | |||||
Advances
to suppliers and other receivables
|
113,384 | 166,588 | ||||||
Inventory
|
104,205 | 85,680 | ||||||
Increase
(decrease) in current liabilities:
|
||||||||
Accounts
payable
|
(12,856 | ) | (63,572 | ) | ||||
Unearned
revenue
|
220,706 | - | ||||||
Accrued
liabilities and other payables
|
243 | (5,172 | ) | |||||
Taxes
payable
|
765,211 | (3,956 | ) | |||||
Net
cash provided by (used in) operating activities
|
10,178,609 | (241,190 | ) | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Cash
acquired at purchase of business
|
10,176 | - | ||||||
Purchase
of business
|
(11,278,744 | ) | - | |||||
Acquisition
of property & equipment
|
(808,739 | ) | (10,212 | ) | ||||
Construction
in progress
|
- | (269,721 | ) | |||||
Net
cash used in investing activities
|
(12,077,307 | ) | (279,933 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Changes
in due from management
|
1,712,790 | 181,061 | ||||||
Changes
in due from related party
|
(79,890 | ) | (110,368 | ) | ||||
Net
cash provided by financing activities
|
1,632,900 | 70,693 | ||||||
EFFECT
OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS
|
165,485 | 7,130 | ||||||
DECREASE
IN CASH & CASH EQUIVALENTS
|
(100,313 | ) | (443,300 | ) | ||||
CASH
& CASH EQUIVALENTS, BEGINNING OF PERIOD
|
117,240 | 560,540 | ||||||
CASH
& CASH EQUIVALENTS, END OF PERIOD
|
$ | 16,927 | $ | 117,240 | ||||
Supplemental
Cash flow data:
|
||||||||
Income
tax paid
|
$ | 372,423 | $ | - | ||||
Interest
paid
|
$ | - | $ | - |
F-16
WEIKANG
BIO-TECHNOLOGY GROUP CO. INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
Weikang
Bio-Technology Group Co., Inc., a Nevada corporation (“Weikang” or “the Company)
was incorporated on May 12, 2004 in the State of Florida as Expedition Leasing,
Inc. (“Expedition”). The Company reincorporated to Nevada and changed to its
present name on July 12, 2008, pursuant to a merger with Weikang, a wholly owned
subsidiary, with Weikang as the surviving entity. The Company is engaged in
the development, manufacture and distribution of health and nutritional
supplements through its indirect wholly owned operating subsidiary, Heilongjiang
Weikang Biotechnology Group Co., Ltd. (“Heilongjiang Weikang”) in the People’s
Republic of China (“PRC” or “China”).
On
December 7, 2007, the Company (as Expedition) entered into an exchange agreement
with Sinary Bio-Technology Holdings Group, Inc., a Nevada corporation (“Sinary”)
and its sole shareholder (the “Sinary Stockholder”), pursuant to which the
Company issued 24,725,200 shares of its common stock to the Sinary Stockholder
in exchange for all of the issued and outstanding common shares of Sinary.
Concurrently, Sinary paid $650,000 to certain former shareholders of the
Company, who surrendered an aggregate of 24,725,200 shares of the Company’s
common stock held by them to the Company for cancellation. As a result, the
Sinary Stockholder currently owns 98% shares of the Company. Since the
Closing Date, Sinary has become a wholly owned subsidiary of the
Company.
Prior to
the acquisition of Sinary, the Company was a non-operating public shell
corporation. Pursuant to Securities and Exchange Commission (“SEC”) rules, the
merger or acquisition of a private operating company into a non-operating public
shell corporation with nominal net assets is considered a capital transaction in
substance, rather than a business combination. Accordingly, for accounting
purposes, the transaction has been treated as a reverse acquisition and a
recapitalization, and pro forma information is not presented. Transaction costs
incurred in the reverse acquisition have been charged to expense.
Sinary
was incorporated under the laws of the State of Nevada on August 31, 2007. On
October 25, 2007, Sinary entered into an equity interests transfer agreement
with the stockholders of Heilongjiang Weikang, a limited liability company in
the PRC, to acquire 100% of the equity interests of Heilongjiang Weikang for 57
million Renminbi (“RMB”), or approximately 7.6 million US dollars.
Heilongjiang
Weikang was incorporated in the Heilongjiang Province, PRC on March 29,
2005, and was formerly known as Heilongjiang Province Weikang Bio-Engineering
Co., Ltd. Heilongjiang Weikang is engaged in development, manufacture and
distribution of health and nutritional supplements in the
PRC.
On July
22, 2008, Heilongjiang Weikang completed the acquisition of 100% of the issued
and outstanding equity interests of Tianfang (Guizhou) Pharmaceutical Co., Ltd.
(“Tianfang”), a Chinese limited liability company, for the aggregate purchase
price of $15,000,000 (the “Consideration”), pursuant to a stock transfer
agreement dated and entered into on June 30, 2008 by and among the Heilongjiang
Weikang, Tianfang, and Tianfang’s two shareholders: Beijing Shiji Qisheng
Trading Co., Ltd., a Chinese limited liability company (“Shiji Qisheng”) and
Tri-H Trade (U.S.A.) Co., Ltd., a California corporation (“Tri-H”, and together
with Shiji Qisheng collectively as the “Selling Shareholders”).
Tianfang
was incorporated in the Guizhou Province, PRC in 1998. Tianfang is engaged
in the development, manufacture and distribution of Chinese herbal extract
products and GMP certified western prescriptive medicine. The Company
believes its market share can be expanded to the southern part of China through
the acquisition of Tianfang.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICY
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Sinary, and the results of operations
of Weikang, Sinary’s wholly-owned subsidiary;, Tianfang, Weikang’s wholly-owned
subsidiary from the date of acquisition (August 1, 2008). All significant
inter-company accounts and transactions have been eliminated in
consolidation.
Use
of Estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets, allowance for doubtful accounts, and
the reserve for obsolete and slow-moving inventories. Actual results could
differ from those estimates.
F-17
WEIKANG
BIO-TECHNOLOGY GROUP CO. INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICY (CONTINUED)
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all highly liquid
investments with an original maturity of three months or less as cash
equivalents.
Accounts
Receivable
The
Company’s policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. There were no allowances for bad debts
at December 31, 2008 and 2007.
Inventory
Inventories
are valued at a lower cost or market with cost determined on a moving weighted
average basis. Costs of work in progress and finished goods comprise direct
material, direct production cost and an allocated portion of production
overheads.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures
for maintenance and repairs are expensed as incurred; additions, renewals and
betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in
operations. Depreciation of property and equipment is provided using the
straight-line method for all assets with estimated lives ranging from 3 to 20
years as follows:
Building
|
20
years
|
Vehicle
|
5
years
|
Office
Equipment
|
3-7
years
|
Production
Equipment
|
3-10
years
|
Land
Use Right
Right to
use land is stated at cost less accumulated amortization. Amortization is
provided using the straight-line method over 50 years.
Impairment
of Long-Lived Assets
Long-lived
assets, which include property, plant and equipment and intangible assets, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability
of long-lived assets to be held and used is measured by a comparison between the
carrying amount of an asset and the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge is
the amount that the carrying amount of the asset exceeds the fair value of the
assets. Fair value is generally determined by the asset’s expected future
discounted cash flows or market value, if readily determinable. Based on its
review, the Company believes that, as of December 31, 2008 and 2007, there were
no significant impairments of its long-lived assets.
F-18
WEIKANG
BIO-TECHNOLOGY GROUP CO. INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICY (CONTINUED)
Income
Taxes
The
Company uses Statement of Financial Accounting Standards (“SFAS”) No. 109,
“Accounting for Income Taxes,” which requires recognition of deferred tax assets
and liabilities for expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
income taxes are considered as the tax consequences in future years for
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes at inception of the business, August 31,
2007. Based on FIN 48, the Company made a comprehensive review of its
portfolio of tax positions in accordance with recognition standards established
by FIN 48. Based on Interpretation 48, the Company recognized no material
adjustments to liabilities or stockholders’ equity. When tax returns are filed,
it is highly certain that some positions taken would be sustained upon
examination by the taxing authorities, while others are subject to uncertainty
about the merits of the positions taken or the amount of the positions that
would be ultimately sustained. The benefit of a tax position is recognized in
the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position
will be sustained upon examination, including the resolution of appeals or
litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely to be realized upon settlement
with the applicable taxing authority. The portion of the benefits associated
with tax positions taken that exceeds the amount measured as described above is
reflected as a liability for unrecognized tax benefits in the accompanying
balance sheets along with any associated interest and penalties that would be
payable to the taxing authorities upon examination.
Interests
associated with unrecognized tax benefits are classified as interest expenses
and penalties are classified in selling, general and administrative expenses in
the statements of income. The adoption of FIN 48 did not have a material impact
on the Company’s financial statements.
Revenue
Recognition
The
Company's revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin (“SAB”) 104. Sales revenue is recognized at the
date of shipment to customers when a formal arrangement exists, the price is
fixed or determinable, the delivery is completed, no other significant
obligations of the Company exist and collectability is reasonably assured.
Payments received before all the relevant criteria for revenue recognition is
met are recorded as unearned revenue.
Sales
revenue represents the invoiced value of goods, which is subject to net of
value-added tax (“VAT”). All of the Company’s products are sold in the PRC and
are subject to Chinese value-added tax of 17% of the gross sales price. This VAT
may be offset by VAT paid by the Company on raw materials and other materials
included in the cost of producing their end product. The Company recorded VAT
payable and VAT receivable net of payments in the financial statements. The VAT
tax return is filed offsetting the payables against the
receivables.
Sales and
purchases are recorded net of VAT collected and paid as the Company acts as an
agent for the government. VAT taxes are not affected by the income
tax holiday.
Sales
returns and allowances was $0 for the four months ended December 31,
2007. The Company does not provide unconditional right of return, price
protection or any other concessions to its dealers or other
customers.
Cost
of Goods Sold
Cost of
goods sold consists primarily of material costs, employee compensation,
depreciation and related expenses, which are directly attributable to the
production of products. Write-down of inventory to lower cost or market is
also recorded in cost of goods sold.
F-19
WEIKANG
BIO-TECHNOLOGY GROUP CO. INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICY (CONTINUED)
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to credit risk consist
primarily of accounts receivable, other receivables, accounts payable and other
payables. The Company does not require collateral or other security to support
these receivables. The Company conducts periodic reviews of its clients'
financial condition and customer payment practices to minimize collecting risk
on accounts receivable.
The
operations of the Company are located in the PRC. Accordingly, the Company's
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, as well as by the
overall performance of the PRC’s economy.
Statement
of Cash Flows
In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
Company's operations are calculated based upon local currencies. As a result,
amounts related to assets and liabilities reported on the statement of cash
flows may not necessarily agree with changes in the corresponding balances on
the balance sheet. Cash flows from operating, investing and financing activities
exclude the effect of the acquisition of Tianfang.
Fair
Value of Financial Instruments
SFAS No.
107, “Disclosures about Fair Value of Financial Instruments,” requires the
Company disclose estimated fair values of financial instruments. The carrying
amounts reported in the statements of financial position for current assets and
current liabilities qualifying as financial instruments are a
reasonable estimate of fair value.
Fair
Value Measurements
On
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements.”
SFAS 157 defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures. The three levels are defined as follow:
|
·
|
Level 1 inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or
liabilities in active
markets.
|
|
·
|
Level 2 inputs to the valuation
methodology include quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the
financial instrument.
|
|
·
|
Level 3 inputs to the valuation
methodology are unobservable and significant to the fair value
measurement.
|
As of
December 31, 2008 and 2007, the Company did not identify any assets and
liabilities that are required to be presented on the balance sheet at fair
value.
Foreign
Currency Translation and Comprehensive Income (Loss)
The
Company’s functional currency is the Renminbi (“RMB”). For financial reporting
purposes, RMB has been translated into United States Dollars ("USD") as the
reporting currency. Assets and liabilities are translated at the exchange rate
in effect at the balance sheet date. Revenues and expenses are translated at the
average rate of exchange prevailing during the reporting period. Translation
adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders' equity as "Accumulated other
comprehensive income".
F-20
WEIKANG
BIO-TECHNOLOGY GROUP CO. INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICY (CONTINUED)
Gains and
losses resulting from foreign currency transactions are included in income.
There has been no significant fluctuation in exchange rate for the conversion of
RMB to USD after the balance sheet date.
The
Company uses SFAS No 130, “Reporting Comprehensive Income”. Comprehensive income
is comprised of net income and all changes to the statements of stockholders’
equity, except the changes in paid-in capital and distributions to stockholders
due to investments by stockholders. Comprehensive income for the four months
ended December 31, 2007 included net income and foreign currency translation
adjustments.
Stock-Based
Compensation
The
Company accounts for its stock-based compensation in accordance with SFAS No.
123R, “Share-Based Payment, an Amendment of FASB Statement No. 123.” The
Company recognizes in the statement of operations the grant-date fair value of
stock options and other equity-based compensation issued to employees and
non-employees.
Basic
and Diluted Earning Per Share (EPS)
Basic EPS
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed similarly to basic net income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Diluted net earning per share is based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period. For the four months ended December 31, 2007, the Company did
not have any dilutive securities.
Segment
Reporting
SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
requires a use of the “management approach” model for segment reporting. The
management approach model is based on the way a company's management organizes
segments within the company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure, or any other manners in which management
disaggregates a company.
SFAS
131 has no effect on the Company's financial statements as substantially all of
the Company's operations are conducted in one industry segment. The Company has
one reportable business segment. All of the Company's assets are located in the
PRC.
Research
and Development
Research
and development costs are related primarily to the development of new
nutritional and health supplements products. Research and development costs are
expenses as incurred. For the four months ended December 31, 2007 the research
and development expense were $0.
Start-up
Costs
In
accordance with the American Institute of Certified Public Accountants Statement
of Position 98-5, “Reporting on the Costs of Start-up Activities”, the Company
expenses all costs incurred in connection with the start-up and organization of
the Company.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the manner of
presentation in the current year.
F-21
WEIKANG
BIO-TECHNOLOGY GROUP CO. INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICY (CONTINUED)
New
Accounting Pronouncements
Employer’s Disclosures about
Postretirement Benefit Plan Assets
In
December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures
about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”). FSP
FAS 132(R)-1 applies to an employer that is subject to the disclosure
requirements of SFAS No. 132 (revised 2003), “Employers’ Disclosures
about Pensions and Other Postretirement Benefits” (“SFAS 132R”) and amends
SFAS 132R to provide guidance on an employer’s disclosures about plan
assets of a defined benefit pension or other postretirement plan. The
disclosures about plan assets required by FSP FAS 132(R)-1 shall be
provided for fiscal years ending after December 15, 2009. Earlier
application is permitted. The Company does not expect the adoption of FSP
FAS 132(R)-1 to have a material impact on its consolidated financial
statements.
Accounting for Defensive
Intangible Assets
In
November 2008, the FASB issued EITF Issue No. 08-7, “Accounting for
Defensive Intangible Assets” (“EITF 08-7”). EITF 08-7 applies to all
acquired intangible assets in situations in which the acquirer does not intend
to actively use the asset but intends to hold the asset to prevent its
competitors from obtaining access to the asset (a defensive intangible asset).
Defensive intangible assets could include assets that the acquirer will never
actively use, as well as assets that will be used by the acquirer during a
transition period when the intention of the acquirer is to discontinue the use
of those assets. EITF 08-7 concluded that a defensive intangible asset
should be accounted for as a separate unit of accounting and should be amortized
over the period that the defensive intangible asset directly or indirectly
contributes to the future cash flows of the entity. EITF 08-7 is effective
prospectively for intangible assets acquired on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.
Earlier application is not permitted.
Accounting for Financial
Guarantee Insurance Contracts
In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.” The
scope of this Statement is limited to financial guarantee insurance (and
reinsurance) contracts, as described in this Statement, issued by enterprises
included within the scope of Statement 60. Accordingly, this Statement does not
apply to financial guarantee contracts issued by enterprises excluded from the
scope of Statement 60 or to some insurance contracts that seem similar to
financial guarantee insurance contracts issued by insurance enterprises
(such as mortgage guaranty insurance or credit insurance on trade receivables).
This Statement also does not apply to financial guarantee insurance contracts
that are derivative instruments included within the scope of FASB Statement No.
133, “Accounting for Derivative Instruments and Hedging Activities.” This
Statement will not have an impact on the Company’s consolidated financial
statements.
The Hierarchy of Generally
Accepted Accounting Principles
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This Statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement will not have an
impact on the Company’s consolidated financial statements.
Determination of the Useful
Life of Intangible Assets
In
April 2008, the FASB issued FASB Staff Position FAS 142-3, “Determination
of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”),
and requires additional disclosures. The objective of FSP FAS 142-3 is to
improve the consistency between the useful life of a recognized intangible
asset under SFAS 142 and the period of expected cash flows used to measure the
fair value of the asset under SFAS No. 141 (R), “Business Combinations”
(“SFAS 141(R)”), and other accounting principles generally accepted in the
United States of America. FSP FAS 142-3 applies to all intangible assets,
whether acquired in a business combination or otherwise and shall be effective
for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The
guidance for determining the useful life of intangible assets shall be applied
prospectively to intangible assets acquired after the effective date. The
disclosure requirements apply prospectively to all intangible assets
recognized as of, and subsequent to, the effective date. Early adoption is
prohibited. The Company does not expect the adoption of FSP FAS 142-3 to have a
material impact on its consolidated financial statements.
F-22
WEIKANG
BIO-TECHNOLOGY GROUP CO. INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICY (CONTINUED)
Disclosures about Derivative
Instruments and Hedging Activities
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133.” This
Statement changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. Based on current conditions, the Company does not believe that
the adoption of SFAS 161 will have a significant impact on its consolidated
financial statements.
Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No.
51
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS
160”). SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements separated from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS 160 clarifies
that changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. Such gain or
loss will be measured by the fair value of the noncontrolling equity investment
on the deconsolidation date. SFAS 160 also includes expanded disclosure
requirements regarding the interests of the parent and its noncontrolling
interest. SFAS 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. The Company
expects SFAS 160 will have an impact on accounting for business combinations
once adopted but the effect is dependent upon future acquisitions at that
time.
Business
Combinations
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations (“SFAS 141R”). SFAS 141R will significantly change the accounting
for business combinations. Under SFAS 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS 141R will change
the accounting treatment for certain specific items, including:
●
|
Acquisition costs will be
generally expensed as
incurred;
|
●
|
Noncontrolling interests
(formerly known as “minority interests” – see SFAS 160 discussion below)
will be valued at fair value at the acquisition
date;
|
●
|
Acquired contingent liabilities
will be recorded at fair value at the acquisition date and subsequently
measured at either the higher of such amount or the amount determined
under existing guidance for non-acquired
contingencies;
|
●
|
In-process research and
development will be recorded at fair value as an indefinite-lived
intangible asset at the acquisition
date;
|
●
|
Restructuring costs associated
with a business combination will be generally expensed subsequent to the
acquisition date; and
|
●
|
Changes in deferred tax asset
valuation allowances and income tax uncertainties after the acquisition
date generally will affect income tax
expense.
|
SFAS 141R
also includes a substantial number of new disclosure requirements. SFAS 141R
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. Earlier adoption is prohibited. Accordingly, since
we are a calendar year-end company we will continue to record and disclose
business combinations following existing GAAP until January 1, 2009. The
Company believes that SFAS 141R will have an impact on accounting for business
combinations once adopted but the effect depends on the future acquisitions at
that time.
Accounting for Nonrefundable
Advance Payments for Goods or Services Received for use in Future Research and
Development Activities
In
June 2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been
performed. EITF 07-03 is effective for fiscal years beginning after
December 15, 2008. The Company does not expect the adoption of FSP EITF
07-3 to have a material impact on its consolidated financial
statements.
F-23
WEIKANG
BIO-TECHNOLOGY GROUP CO. INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
3.
INVENTORY
Inventory
at December 31, 2008 and 2007 was as follows:
2008
|
2007
|
|||||||
Raw
materials
|
$ | 33,676 | $ | 136,010 | ||||
Packing
materials
|
22,409 | 28,258 | ||||||
Finished
goods
|
95,857 | 34,892 | ||||||
Total
|
$ | 151,942 | $ | 199,160 |
4.
PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following at December 31, 2008 and
2007:
2008
|
2007
|
|||||||
Building
|
$
|
8,244,669
|
$
|
2,736,841
|
||||
Building
improvements
|
911,462
|
508,184
|
||||||
Production
equipment
|
2,319,654
|
482,062
|
||||||
Office
furniture and equipment
|
179,752
|
24,193
|
||||||
Vehicles
|
118,448
|
63,894
|
||||||
11,773,985
|
3,815,174
|
|||||||
Less:
Accumulated depreciation
|
(675,939
|
)
|
(43,986
|
)
|
||||
$
|
11,098,046
|
$
|
3,771,188
|
Depreciation
expense for the year ended December 31, 2008 and the four months ended December
31, 2007 was approximately $619,000 and $43,000,
respectively.
5.
CONSTRUCTION IN PROGRESS
Construction
in progress mainly represented payment made for the construction of a new plant
for Heilongjiang Weikang during 2007. The construction was completed
during 2008.
6.
ADVANCES TO SUPPLIERS AND OTHER RECEIVABLES
Advances
to suppliers represented prepayment for the raw material. At December
31, 2008 and 2007, advances to suppliers amounted $9,925 and $73,033,
respectively. Other receivables represented cash advances to
employees and sales representatives for normal business purposes such as
advances for traveling expense. At December 31, 2008 and 2007, other
receivables amounted $8,050 and $66,082, respectively.
F-24
WEIKANG
BIO-TECHNOLOGY GROUP CO. INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
7.
RELATED PARTY TRANSACTIONS
Due
from Weikang’s Management and Other Income – Lease income
At
December 31, 2008, due from management represented lease payments received by
Weikang’s CEO on behalf of Weikang for leasing out to a third party the workshop
of manufacturing the royal jelly and the right to use its technology for
manufacturing the royal jelly for the period from January 1, 2008 through June
30, 2010. During 2008, Weikang’s CEO received lease income of
$1,007,919 (RMB 7,000,000) and prepaid lease payment of $219,472 (RMB 1,500,000)
on behalf of the Company.
Other
income consisted of income for leasing out to a third party the workshop of
manufacturing the royal jelly and the right to use the technology for
manufacturing the royal jelly for the period from January 1, 2008 to June 30,
2010. Total lease payment will be received from leasing out the
workshop for the lease term is 7,500,000 RMB, and 10,000,000 RMB from leasing
out the use right of the technology. During 2008, Weikang’s CEO received
lease income on behalf of the Company for $1,007,919 (RMB 7,000,000, of which,
3,000,000 RMB was from leasing out the workshop and 4,000,000 RMB was from
leasing out the use right).
At
December 31, 2007, due from management represents payments received by Weikang’s
management on behalf of Weikang from Weikang’s dealers net of payments made for
purchases made by the management on behalf of Weikang. The transactions
were recorded in the officer’s personal bank account. During the four
months ended December 31, 2007 since the acquisition of Heilongjiang Weikang by
Sinary, $687 sales receipts were deposited into the officer’s personal bank
cards, and $608,503 purchase payments were made from the same bank
cards.
Due
from Related Party
At
December 31, 2007, due from related party of $135,777 represented accounts
receivable arising from sales made to a related company owned by the Company’s
chief executive officer. Sales to this related party during the four months
ended December 31, 2007 since the acquisition of Heilongjiang Weikang by
Sinary was approximately $92,000.
Sales
to Related Party
During
2008 and the four months ended December 31, 2007, the Company sold goods
for $1,081,000 and $213,000, respectively, to another related company
owned by the Company’s chief executive officer. The receivables from this
related party was $0 as of December 31, 2008 and 2007.
Advance
from Officer and Other Expense
Advance
from officer and other expense represented the payment of $650,000 made by an
officer of Heilongjiang Weikang on behalf of Sinary to certain former
shareholders of the Company in connection with the reverse
acquisition between the Company and Sinary on December 7,
2007. The advance from officer bears no interest and payable on
demand.
8.
INTANGIBLE ASSETS
Intangible
assets consisted of the following at December 31, 2008 and 2007:
2008
|
2007
|
|||||||
Land
use right
|
$
|
8,723,411
|
$
|
540,263
|
||||
Goodwill
arising from acquisition of Tianfang
|
3,578,359
|
-
|
||||||
Software
|
7,209
|
-
|
||||||
12,308,979
|
540,263
|
|||||||
Less:
Accumulated amortization
|
(94,574
|
)
|
(1,908
|
)
|
||||
$
|
12,214,405
|
$
|
538,355
|
F-25
WEIKANG
BIO-TECHNOLOGY GROUP CO. INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
8.
INTANGIBLE ASSETS (CONTINUED)
All land
in the PRC is government owned and can not be sold to any individual or company.
However, the government grants the user a “land use right” to use the land. The
Company has the right to use the land for 50 years and is amortizing the right
on a straight-line basis for 50 years.
Amortization
expense for year ended December 31, 2008 and the four months ended December 31,
2007 was approximately $92,000 and $2,000, respectively. Amortization
expense for the next five years is expected to be $204,000, $204,000, $204,000,
$204,000 and $204,000 respectively.
9. MAJOR CUSTOMERS AND VENDORS
Five
major customers who are dealers of the Company accounted for 55% of the
Company’s net revenue for 2008. Each customer accounted for about
14%, 12%, 11%, 10% & 8% of the sales, of which, one was the related party
owned by the shareholder of Weikang accounted for about 1% of the total
sales. At December 31, 2008, the total receivable balance due from
these five customers was $0.
Five
major customers who are dealers of the Company accounted for 97% of the
Company’s net revenue for four months ended December, 2007 since the acquisition
of Heilongjiang Weikang by Sinary. Each customer accounted for about
26%, 21%, 19%, 16% & 15% of the sales, of which, one was the related party
owned by the shareholder of Weikang accounted for about 26% of the total
sales. At December 31, 2007, the total receivable balance due from
these five customers was $0.
Seven
vendors provided 64% of the Company’s purchase of raw materials for
2008. Each vendor accounted for 16%, 10%, 9%, 8%, 7%, 7%& 7% of
the purchase. The Company did not have accounts payable to these vendors at
December 31, 2008.
Seven
vendors provided 89% of the Company’s purchase of raw materials for four months
ended December 31, 2007. Each vendor accounted for 16%, 14%, 13%,
13%, 12%, 11% & 10% of the purchase The Company did not have accounts
payable to these vendors at December 31, 2007.
10.
TAX PAYABLE
Tax
payable consisted of the following at December 31, 2008:
2008
|
||||
Income
tax payable
|
$
|
381,659
|
||
Value
added tax payable
|
306,012
|
|||
Individual
income tax withholding payable
|
504,123
|
|||
Sales
tax payable
|
51,210
|
|||
Other
taxes
|
7,083
|
|||
$
|
1,250,087
|
F-26
WEIKANG
BIO-TECHNOLOGY GROUP CO. INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
11.
OTHER PAYABLES
Other
payables mainly consisted of the purchase price of approximately $7.62 million
that Sinary was originally obligated to pay to Heilongjiang Weikang’s
former owners within one year from the closing of the acquisition of
Heilongjiang Weikang. This payable does not bear any interest; this payable
has been renewed to October 25, 2009.
Other
payables also consisted of the unpaid portion of the purchase price of
approximately $3.8 million that Heilongjiang Weikang is obligated to pay to
Tianfang’s former owners within one year from the closing of acquisition
date. This payable does not bear any interest.
12.
DEFFERED TAX ASSET (LIABILITY), NET
Deferred
tax represented differences between the tax bases and book bases of property,
equipment and land use right.
At
December 31, 2008 and 2007, deferred tax asset (liability) consisted of the
following:
2008
|
2007
|
|||||||
Deferred
tax asset for property and equipment
|
37,742
|
|||||||
Deferred
tax asset arising from the acquisition of Heilongjiang
Weikang
|
$
|
29,592
|
$
|
27,726
|
||||
Deferred
tax liability arising from the acquisition of Tianfang
|
(3,578,359)
|
-
|
||||||
Deferred
tax asset (liability)
|
$
|
(3,551,025)
|
$
|
27,726
|
13.
INCOME TAXES
Heilongjiang
Weikang is governed by the Income Tax Law of the PRC concerning the private
enterprises that are generally subject to tax at a statutory rate of 25% (33%
prior to 2008) on income reported in the statutory financial statements after
appropriate tax adjustments. Heilongjiang Weikang is exempt from income tax for
three years from 2006 to 2008. Tianfang is subject to 25% income tax
rate. Net income for years ended December 31, 2008 and the four months
ended December 31,2007 would have been lower by approximately $1,251,000
and $65,000 or $0.05 and $0.003 earnings per share, respectively, if
Heilongjiang Weikang was not subject an income tax holiday.
Sinary
had net operating loss of approximately $0 and $650,000 at December 31,
2008 and 2007, respectively. NOL can be carryforward up to 20 years from the
year the loss is incurred. A 100% valuation allowance has been
established due to the uncertainty of its realization.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the year ended December 31, 2008 and the four months ended
December 31, 2007:
2008
|
2007
|
|||||||
US
statutory rates
|
34.0
|
%
|
34.0
|
%
|
||||
Tax
rate difference
|
(9.0
|
)%
|
(1.0
|
)%
|
||||
Effect
of tax holiday
|
(15.7
|
)%
|
-
|
|||||
Tax
per financial statements
|
9.3
|
%
|
33.0
|
%
|
F-27
WEIKANG
BIO-TECHNOLOGY GROUP CO. INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
14.
STATUTORY RESERVES
Pursuant
to the new corporate law of the PRC effective on January 1, 2006, the Company is
now only required to maintain one statutory reserve by appropriating from its
after-tax profit before declaration or payment of dividends. The statutory
reserve represents restricted retained earnings.
Surplus
Reserve Fund
The
Company is now only required to transfer 10% of its net income, as determined
under the PRC accounting rules and regulations, to a statutory surplus reserve
fund until such reserve balance reaches 50% of the Company’s registered
capital.
The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered
capital.
Common
Welfare Fund
Common
welfare fund is a voluntary fund that the Company can elect to transfer 5% to
10% of its net income to this fund. This fund can only be utilized on capital
items for the collective benefit of the Company’s employees, such as
construction of dormitories, cafeteria facilities, and other staff welfare
facilities. This fund is non-distributable other than upon
liquidation.
15.
CONTINGENCIES
The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company’ s operations may be adversely affected by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of taxation,
among other things.
The
Company’s sales, purchases and expenses transactions are denominated in RMB and
all of the Company’s assets and liabilities are also denominated in RMB. The RMB
is not freely convertible into foreign currencies under the current law. In
China, foreign exchange transactions are required by law to be conducted only by
authorized financial institutions. Remittances in currencies other than RMB may
require certain supporting documentation in order to affect the
remittance.
16.
ACQUISITION OF TIANFANG AND UNAUDITED PRO FORMA INFORMATION
On
October 25, 2007, Sinary entered into an equity interests transfer agreement
with the owners of Heilongjiang Weikang to acquire 100% of the equity interests
of Heilongjiang Weikang for the sum of 57 million RMB, or approximately 7.6
million US dollars. The operating results of Weikang are included in the
accompanying consolidated statements of operations from the acquisition
date. For convenience of reporting the acquisition for accounting
purposes, October 31, 2007 has been designated as the acquisition
date.
The
following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition. The fair values are
based on third-party valuation. The fair value of the net assets acquired
exceeded the total consideration for the acquisition by approximately $595,000.
The excess (negative goodwill) was allocated on a pro rata basis to long-lived
assets.
Cash
|
$
|
559,656
|
||
Accounts
receivable
|
9,611
|
|||
Advance
to suppliers
|
250,474
|
|||
Other
receivables
|
45,979
|
|||
Inventory
|
278,933
|
|||
Due
from related parties
|
2,821,307
|
|||
Property
and equipment
|
3,712,847
|
|||
Intangible
assets
|
526,872
|
|||
Deferred
tax asset
|
27,039
|
|||
Accounts
payable
|
(86,663
|
)
|
||
Advances
from related party
|
(513,223
|
)
|
||
Other
current liabilities
|
(12,511
|
)
|
||
Purchase
price
|
$
|
7,620,321
|
F-28
WEIKANG
BIO-TECHNOLOGY GROUP CO. INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
16.
ACQUISITION OF TIANFANG AND UNAUDITED PRO FORMA INFORMATION
(CONTINUED)
The
intangible asset, which is principally land rights, is being amortized over 50
years.
On July
22, 2008, Heilongjiang Weikang completed the acquisition of 100% of the issued
and outstanding equity interests of Tianfang for the aggregate purchase price of
$15,000,000 (RMB 102,886,500).
The
operating results of the Company and Tianfang for the five months ended December
31, 2008 are included in the accompanying consolidated statements of operations
from the acquisition date. For convenience of reporting the
acquisition for accounting purposes, August 1, 2008 has been designated as the
acquisition date.
The
following table summarizes the fair values of the assets acquired and
liabilities assumed of Tianfang, at the date of acquisition. The
total consideration for acquisition exceeded fair value of the net assets
acquired by $3,565,578. The excess was recorded as goodwill.
Cash
|
$
|
10,146
|
||
Accounts
receivable
|
388,641
|
|||
Other
receivables
|
3,988
|
|||
Inventory
|
45,161
|
|||
Property
and equipment
|
7,194,302
|
|||
Land
use right
|
8,117,686
|
|||
Goodwill
|
3,565,578
|
|||
Tax
payable
|
(498,259
|
)
|
||
Advances
from shareholder
|
(221,794
|
)
|
||
Deferred
tax liability
|
(3,605,449
|
)
|
||
Purchase
price
|
$
|
15,000,000
|
The
following unaudited pro forma consolidated results of operations of the Company
for the years ended December 31, 2008 and 2007 present the Company’s operations
as if the acquisition of Sinary, Heilongjiang Weikang and Tianfang had occurred
on January 1, 2008 and 2007, respectively. The pro forma results are
not necessarily indicative of the actual results that would have occurred had
the acquisitions been completed as of the beginning of the periods presented,
nor are they necessarily indicative of future consolidated results.
For the years ended December 31, 2008 and 2007
|
|
Pro forma
|
|
|
Pro forma
|
|
||
|
|
Consolidated
2008
|
|
|
Consolidated
2007
|
|
||
Net
revenue
|
$
|
13,925,832
|
$
|
19,301,999
|
||||
Cost
of revenue
|
5,102,876
|
9,086,719
|
||||||
Gross
profit
|
8,822,956
|
10,215,280
|
||||||
Total
operating expenses
|
1,317,008
|
2,791,024
|
||||||
Income
from operations
|
7,505,948
|
7,424,256
|
||||||
Total
non-operating expenses
|
959,016
|
(643,685
|
)
|
|||||
Income
before income tax
|
8,464,965
|
6,780,571
|
||||||
Income
tax
|
881,677
|
1,396,960
|
||||||
Net
income
|
$
|
7,583,288
|
$
|
5,383,611
|
||||
Basic
and diluted weighted average shares outstanding
|
25,229,800
|
24,822,865
|
||||||
Basic
and diluted net earnings per share
|
$
|
0.30
|
$
|
0.22
|
F-29
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION
We
estimate that expenses in connection with the distribution described in this
registration statement (other than brokerage commissions, discounts or other
expenses relating to the sale of the shares by the selling security holders)
will be as set forth below. We will pay all of these expenses. The amounts shown
below, with the exception of the Securities and Exchange Commission registration
fee, are estimates.
SEC
registration fee
|
$
|
374
|
||
Accounting
Fees and Expenses
|
2,500
|
|||
Legal
Fees and Expense
|
35,000
|
|||
Printing
Expenses
|
1,000
|
|||
Miscellaneous
|
3,626
|
|||
|
||||
Total
|
$
|
42,500
|
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
The
Company's directors and executive officers are indemnified as provided by the
Nevada law and the Company's Bylaws. These provisions state that the
Company's directors may cause the Company to indemnify a director or former
director against all costs, charges and expenses, including an amount paid to
settle an action or satisfy a judgment, actually and reasonably incurred by him
as a result of him acting as a director. The indemnification of costs can
include an amount paid to settle an action or satisfy a judgment. Such
indemnification is at the discretion of the Company's board of directors and is
subject to the Securities and Exchange Commission's policy regarding
indemnification.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
RECENT
SALES OF UNREGISTERED SECURITIES
The
following securities were issued within the past three years and were not
registered under the Securities Act of 1933. Shares issued to
Weikang’s shareholders were not registered under the Securities Act of 1933, as
amended (“Securities Act”) in reliance upon the exemption from the registration
requirements provided in Section 4(2) of, or the safe harbor from such
registration provided by Regulation S, promulgated under the Securities
Act.
|
A.
|
February
2010 Issuance for Services
|
In
February 2010, the Company issued a consultant, 200,000 shares as compensation
for consulting services. Such securities were not registered under
the Securities Act of 1933. The issuance of these shares was exempt
from registration, in part pursuant to Regulation S and Regulation D under the
Securities Act of 1933 and in part pursuant to Section 4(2) of the Securities
Act of 1933.
|
B.
|
January
20, 2010 Financing
|
On
January 20, 2010, the Company entered into a Subscription Agreement with three
“accredited” investors. Pursuant to the Subscription Agreement,
the investors purchased 1,470,588 shares of the Company’s common stock
(“Investor Shares”) at $1.70 per share. Pursuant to the Subscription Agreement,
the Company has agreed to file a resale Registration Statement on Form S-1 by
April 9, 2010 registering the Investor Shares and the shares of common stock
issuable under warrants issued to the investors with the Securities and Exchange
Commission. In the event the Company has not filed the
Registration Statement by the required filing date, or the Registration
Statement is not declared effective by the SEC by 120 days after the required
filing date, the Company has agreed to pay liquidated damages to each investor,
at a rate per month equal to 0.50% of the total purchase price of the shares
purchased by such investor pursuant to the Subscription Agreement. In
no event, however, may the penalties exceed 9% in the aggregate of such total
purchase price.
38
The Investor Shares were
issued to “accredited” investors, as such term is promulgated by the
SEC. In reliance upon each such investor’s representation as an
“accredited investor,” among other representations, the offer and sale of the
securities described above are exempt from the registration requirements under
the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof and in
reliance upon Rule 506 of Regulation D promulgated by the SEC. We
made this determination based on the representations of the stockholders of
Weikang Bio-Technology Group Company, Inc. that such stockholders were
"accredited investors" within the meaning of Rule 501 of Regulation D
promulgated under the Securities Act, and that such stockholders were acquiring
our common stock, for investment purposes for their own respective accounts and
not as nominees or agents, and not with a view to the resale or distribution
thereof, and that the entities and individuals understood that the shares of our
common stock may not be sold or otherwise disposed of without registration under
the Securities Act or an applicable exemption therefrom.
Global
Hunter Securities, LLC acted as placement agent with respect to the offering of
Investor Shares and received a cash fee of $125,000 (equal to 5% of the gross
proceeds of the Offering) and warrants to purchase an aggregate of: (a) 36,764
shares of Common Stock at an exercise price of $3.00 per share and (b) 36,764
shares at an exercise price of $5.00 per share.
FirsTrust
China Ltd. acted as consultant to the Company with respect to its business and
financing and received a cash fee of $125,000 and warrants to purchase an
aggregate of: (a) 36,764 shares of Common Stock at an exercise price of $3.00
per share and (b) 36,764 shares at an exercise price of $5.00 per
share.
In
addition, the Company issued the following securities: (i) 180,000
shares of Common Stock to Jinsun, LLC, an investor relations firm, (ii) 600,000
shares of Common Stock to Far East Strategies, LLC, a consultant, for business
development and capital markets advice, and (iii) 7,000 shares of Common Stock
to The Crone Law Group for legal services.
Such
securities were not registered under the Securities Act of 1933. The
issuance of these shares was exempt from registration, in part pursuant to
Regulation S and Regulation D under the Securities Act of 1933 and in part
pursuant to Section 4(2) of the Securities Act of 1933.
|
C.
|
Share
Exchange
|
On
December 7, 2007, we issued 24,725,200 shares of common stock to the stockholder
of Sinary in exchange for 100% of the issued and outstanding capital stock of
Sinary. On December 7, 2007, we executed (at the time of execution,
our corporate name was Expedition Leasing, Inc.) a Share Exchange Agreement by
and among Sinary Bio-Technology Holdings Group, Inc., a Nevada corporation (or
Sinary), and the holder of 100% of Sinary’s issued and outstanding common stock,
on the one hand, and us and certain holders of our common stock who held a
majority of the issued and outstanding common stock in the aggregate (referred
to as the “Expedition Leasing Stockholders”), on the other hand.
At the
closing of this transaction, which occurred on December 7, 2007, we issued
24,725,200 shares of our common stock to the Sinary Stockholder in exchange for
100% of the common stock of Sinary (the “Share Exchange Transaction”).
Concurrently on the Closing Date, the Expedition Leasing Stockholders cancelled
24,725,200 shares of Expedition common stock held by them. Immediately after the
Closing, we had a total of 25,229,800 shares of common stock outstanding, with
the Sinary Stockholder owning approximately 98% of our issued and outstanding
common shares.
Except
for the Share Exchange Agreement and the transactions contemplated thereunder,
neither the Company nor its sole director and sole executive officer serving
prior to the consummation of the Share Exchange Transaction had any material
relationship with Sinary or the Sinary Stockholder.
The
issuance of these shares was exempt from registration in reliance on the
exemptions for sales of securities not involving a public offering, as set forth
in Rule 506 promulgated under the Securities Act and in Section 4(2) of the
Securities Act, based on the following: (a) the investor confirmed to us
that she was either an “accredited investor,” as defined in Rule
501 of Regulation D promulgated under the Securities Act or had such background,
education and experience in financial and business matters as to be able to
evaluate the merits and risks of an investment in the securities; (b) there
was no public offering or general solicitation with respect to the offering;
(c) the investor was provided with certain disclosure materials and all
other information requested with respect to our company; (d) the investor
acknowledged that all securities being purchased were “restricted securities”
for purposes of the Securities Act, and agreed to transfer such securities only
in a transaction registered under the Securities Act or exempt from registration
under the Securities Act; and (e) a legend was placed on the certificate
representing each such security stating that it was restricted and could only be
transferred if subsequently registered under the Securities Act or transferred
in a transaction exempt from registration under the Securities
Act.
39
EXHIBITS
Exhibit No.
|
Description
|
|
2.1
|
Share
Exchange Agreement among Expedition Leasing Inc. (“Expedition Leasing”),
certain stockholders of Expedition Leasing, Sinary Bio-Technology Holding
Group, Inc. (“Sinary”) and the sole stockholder of Sinary dated December
7, 2007 (1)
|
|
2.2
|
Equity
Transfer Agreement between Sinary and the owners of 100% of the registered
equity of Heilongjiang Weikang Bio-Technology Group Co., Ltd. dated
October 25, 2007 (1)
|
|
2.3
|
Agreement
and Plan of Merger dated as of June 4, 2008 between Expedition
Leasing and Weikang (2)
|
|
3.1
|
Articles
of Incorporation of Weikang (2)
|
|
3.2
|
Bylaws
of Weikang (2)
|
|
4.1
|
Form
of Series A and B Common Stock
Warrant (3)
|
|
5.1
|
Opinion
of The Crone Law Group **
|
|
10.1
|
Stock
Transfer Agreement dated as of June 30, 2008 by and among Heilongjiang
Weikang Bio-Technology Group Co., Ltd., Beijing Shiji Qisheng Trading Co.,
Ltd., Tri-H Trade (U.S.A.) Co., Ltd., and Tianfang (Guizhou)
Pharmaceutical Co., Ltd. (4)
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10.2
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The
Weikang Bio-Technology Group Company, Inc. 2008 Stock Incentive Plan
(2)
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10.3
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Subscription
Agreement dated January 20, 2010, between Weikang and the subscribers
identified on the signature pages
thereto (3)
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10.4
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Investor
Relations Escrow Agreement dated January 20, 2010, among Weikang, the
escrow agent named therein and Opus Holdings Three, Ltd.
(3)
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10.5
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Lease
Agreement dated January 1, 2008 between Heilongjiang Weikang
Bio-Technology Group and Harbin Dongfeng Pharmaceutical Corp. Ltd.
relating to the lease of the workshop and technology for manufacturing
royal jelly.*
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10.6
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Shell
Company Purchase Agreement dated December 8, 2007 between the Company and
Yin Wang relating the advance from an officer of the
Company*
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10.7
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English
translation of land use right certificate issued by Xiuwen County Land
Bureau and Bureau of Real Estate Management of Guiyang City for the
benefit of Tianfang (Guizhou) Pharmaceutical Co., Ltd., which expires
December 9, 2051*
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10.8
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English
translation of land use right certificate issued by Bureau of Land and
Resources of Shuang-Cheng City for the benefit of Heilongjiang
Weikang Bio-Technology Group, which expires April 8,
2055*
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21.1
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List
of Subsidiaries *
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23.1
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Consent
of Independent Registered Public Accounting Firm. *
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23.2
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Consent
of The Crone Law Group (contained in Exhibit 5.1)
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24.1
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Power
of Attorney (contained on the Signature Page of this Registration
Statement on Form S-1)
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*Filed
herewith.
**To be
filed by amendment.
(1)
Incorporated by reference from the Company’s Form 8-K filed with the SEC on
December 10, 2007.
(2)
Incorporated by reference from the Company’s Schedule 14C filed with the SEC on
May 14, 2008.
(3)
Incorporated by reference from the Company’s Form 8-K filed with the SEC on
January 26, 2010.
(4)
Incorporated by reference from the Company’s Form 8-K filed with the SEC on July
24, 2008.
40
UNDERTAKINGS
(a) The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the effective
registration statement; and
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2) That,
for the purpose of determining liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser, each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, shall be deemed to be part of
and included in the registration statement as of the date it is first used after
effectiveness. Provided, however
, that no statement made in a registration statement or prospectus that is part
of the registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or prospectus that is
part of the registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify any statement that
was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to such
date of first use.
(b) The
undersigned registrant hereby undertakes, that for the purpose of determining
liability of the registrant under the Securities Act of 1933, to any purchaser
in the initial distribution of the securities: the undersigned registrant
undertakes that in a primary offering of securities of the undersigned
registrant pursuant to this registration statement, regardless of the
underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(1) Any
preliminary prospectus or prospectus of the undersigned registrant relating to
the offering required to be filed pursuant to Rule 424;
(2) Any
free writing prospectus relating to the offering prepared by or on behalf of the
undersigned registrant or used or referred to by the undersigned
registrant;
(3) The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
(4) Any
other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
(c)
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
41
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, in Harbin, the People’s Republic of China, on March 25,
2010.
WEIKANG
BIO-TECHNOLOGY GROUP COMPANY, INC.
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||
By:
/s/ Yin
Wang
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||
Yin
Wang
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||
Chief
Executive Officer
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||
KNOW ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Yin Wang as true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution and for him/her and in his/her name, place and stead, in any and
all capacities to sign any and all amendments (including pre-effective and
post-effective amendments) to this Registration Statement, as well as any new
registration statement filed to register additional securities pursuant to Rule
462(b) under the Securities Act, and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
stated.
Signature
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Title
|
Date
|
||
/s/
Yin Wang
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Director
and Chief Executive Officer
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March
25, 2010
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||
Yin
Wang
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(Principal
Executive Officer)
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|||
/s/
Yanhua Liu
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Chief
Financial Officer
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March
25, 2010
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||
Yanhua
Liu
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(Principal
Financial and Accounting Officer)
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|||
/s/
Wei Wang
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Director
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March
25, 2010
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||
Wei
Wang
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||||
/s/
Weili Wang
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Director
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March
25, 2010
|
||
Weili
Wang
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||||
/s/
Guangxin Wang
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Director
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March
25, 2010
|
||
Guangxin
Wang
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||||
/s/
Yuanyuan Jing
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Director
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March
25, 2010
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||
Yuanyuan
Jing
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||||
42